• Choose a category
• All
• Classic-Fiction

The May 2008 issue of the AAII Journal included an article called "The Stock Market and the Media: Turn It On, But Tune It Out" in which author Dick Davis argued that daily market movement is often illogical. Except in the case of obvious stuff like military coups and natural disasters, nobody knows what makes the markets move on any given day. Short-term changes are usually just random. Besides, they're not relevant if you plan to hang onto the stock over the long term anyway (and if you don't, you shouldn't own stocks in the first place!).

To the long-term investor, daily market movements are mostly just noise. "What's important is repetition or the lack of it," Davis writes. In other words, a trendline (what a stock does over a period of time) is more useful than a datapoint (what that stock is worth on any given day). "Big market moves may be inexplicable, but a long-term…approach precludes the need for explanations." In other words, when you make regular investments for the future, it doesn't matter what the market did today (or why it did it).

Davis isn't the only financial expert who believes that no news is good news—research backs him up. In Why Smart People Make Big Money Mistakes (and How to Correct Them) (Simon & Schuster, 2010), Gary Belsky and Thomas Gilovich cite a Harvard study of investing habits. The results? "Investors who received no news performed better than those who received a constant stream of information, good or bad. In fact, among investors who were trading [a volatile stock], those who remained in the dark earned more than twice as much money as those whose trades were influenced by the media."

Though it may seem reckless to ignore financial news, it's not: If you're saving for retirement 20 or 30 years down the road, today's financial news is mostly irrelevant. So make decisions based on your personal financial goals and your IPS (Know Your Goals), not on whether the market jumped or dropped today.

Common-Sense Investing

In this chapter, you've learned that the stock market provides excellent long-term returns, and that you can do better than 95% of individual investors by putting your money into index funds. Most importantly, you now understand that in order to have any hope of matching the market, you've got to take emotion out of investing.

But how do you put this knowledge to work? What's the best way to take advantage of the things you've learned? The answer is shockingly simple: Set up automatic investments into a portfolio of index funds. After that, ignore the news no matter how exciting or scary things get. Once a year, go through your investments to be sure your asset allocation (explained in the Note on Know Your Goals) still matches your goals. Then just continue to put as much as you can into the market—and let time take care of the rest.

That's it—that's the plan. (Told you it was simple.) Do this and you'll outperform most other individual investors over the long term.

Lazy Portfolios

The most important investment decision you can make—besides how much to invest—is where to invest. As with so many aspects of investing, there's no one option that works for every person.

One factor that can help you decide how to invest your money is risk tolerance. That's a measure of how much uncertainty—and possible loss—you're willing to deal with in your investments. If your risk tolerance is high, you can handle big fluctuations in your investment returns in exchange for the possibility of large gains. If your tolerance is low, on the other hand, you'd rather not deal with the ups and downs—even if that means giving up a chance at making higher returns.

Some of your portfolio should be in fixed-income investments like bonds and CDs, which pay interest on a regular schedule. How much depends on your goals, needs, and risk tolerance. A common rule of thumb is that the percentage of fixed-income investments in your portfolio should be equal to your age. So, if you're 30, you should have 30% in something like a bond