But does that mean you should never deviate from that? If you want to buy an individual stock or invest in a friend’s startup, is that a sin? In short, no.

I sometimes make the analogy to eating habits. Most people can be disciplined most of the time. But if you go to an extreme and try to eat just salad and vegetables at every meal, you’ll eventually go crazy and fall off the wagon in search of french fries or some other junk food.

It’s the same with investing. I like sticking to mostly boring index funds, but if you want to do something a little more interesting every once in a while, I don’t think that’s so bad. And it may allow you to stay more balanced overall.

The lesson? This is an extreme case, but it illustrates a reality about financial planning, and about tax planning in particular: You can never know with certainty what tax rules will be in effect in the future.

So wherever possible, I recommend trying to hedge your bets. For example, if you have the opportunity to contribute to a Roth 401(k), it might be worth giving up the tax benefit in order to accumulate some tax-free funds.

At the same time, some investors advocate for a simple portfolio comprised of just three funds or even just one. So what’s the right answer?

In my view, there is no single “right” answer; there are many ways to construct a sensible portfolio. I wouldn’t get too hung up on whether you have one or three or five or ten funds. What’s more important, in my opinion, is that you have an appropriate asset allocation, broad diversification and low costs.

As English philosopher Carveth Read once wrote, “It is better to be vaguely right than exactly wrong.”

Read was famously frugal. When he came into town, for example, he would park his car several blocks from the town center to avoid having to put coins in the parking meter. That certainly contributed to his ability to amass an $8 million fortune after a career working as a gas station attendant and in other ordinary jobs.

But this headline overlooked a key ingredient in Read’s success: When he died he was 92. He had been investing for decades. And when he received dividends, he always reinvested them. The result was the magic of compound interest.

I don’t want to take anything away from Mr. Read’s investment success, but this is a great illustration of the importance of starting early. If you have a child or a niece or nephew in your life, I always say that the greatest (financial) gift you can give that young person is to explain what a Roth IRA is and to help them get started.

That was one opinion on investment bankers. Several months later, a journalist provided another viewpoint: Goldman Sachs, he wrote, is “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

So which is it? My view is that, in a lot of ways, both are true. Our financial system is today no better than it was when Fred Schwed satirized it decades ago, except that the greed and the excesses are probably worse today than they were then. But despite that, elements of our financial system have delivered enormous benefits for individual investors. Most notably, the cost of retail mutual funds continues to drop.

As long as you stick to simple and straightforward investments, that makes today’s investment environment, in many respects, the best it’s ever been for investors.

These were the simple investment instructions that he had provided to the trustee: “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund”

That was it.

Despite Buffett’s being one of the wealthiest people in the world, the portfolio he recommended was remarkably simple—no actively-managed funds, no hedge funds, no private equity or any other seemingly sophisticated investments. Buffett’s view is that it really doesn’t need to be any more complex than that. I agree.

But you may have also seen the research on momentum. It turns out that today’s stock market returns do, on average, predict tomorrow’s returns.

These two findings seem to be in conflict. If today’s returns can tell you something about tomorrow’s returns, then wouldn’t it be a good idea to time the market?

The chart below, from J.P. Morgan, helps answer this question. As you can see, short-term market returns tell you very little about where the market is headed over the longer term.

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Very frequently, in fact, the market will dip 10% or more at one point or another during a year but still end the year in positive territory.

The bottom line: Yes, the market does exhibit momentum. But it is really more of a statistical phenomenon and difficult to profit from successfully. On balance, my view is that investors are far better off taking a buy-and-hold approach and not attempting to time the market.

That’s because the math just isn’t intuitive, no matter how quick you are with arithmetic. And some of the most commonly used examples are interesting but so hard to believe that they really aren’t useful.

If you fold a piece of paper in half about 40 times, for example, it will form a stack high enough to reach the moon. That’s interesting but hard to imagine.

That’s why I recommend this short video, which does a good job illustrating how very small things can end up having a very large impact. This example uses dominos, but it’s a good representation of what can happen with your savings over time.

In a paper titled Four Reasons to Embrace Global Investing, researchers at Vanguard provide one answer to this question: What they found is that historically an allocation to international stocks in the range of 30% to 40% has provided the greatest diversification benefit in terms of volatility reduction.

In other research, Vanguard provides an equally important finding: While international stocks can help dampen a portfolio’s volatility, over time there has been no demonstrable performance advantage to either domestic or international stocks.

So the reason you would want to own international stocks, according to this research, is really just for the diversification benefit.

“How can anyone govern a nation that has two hundred and forty-six different kinds of cheese?”

This comment is funny, but in every joke, there is a kernel of truth. There’s no question that the French people are strong-willed and may be difficult to govern. But in one way or another, you could make the same observation about most countries.

What does this mean from the perspective of an investor? This is yet another reason to diversify your investments globally. At any given time, different regions will look more attractive than others. Between 2000 and 2005, for example, the euro was on the rise, making European stock markets very attractive to international investors. But ten years later, between 2010 and 2015, it was the reverse. More recently, international stocks have been rising again.

The bottom line: Most every investment—and investment market—has its pros and cons. But depending on the chosen time period, the pros or the cons might be more apparent. That’s why, simple as it sounds, I believe so strongly in building, and maintaining, a diversified portfolio.

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A cow for her milk,
A hen for her eggs,
And a stock, by heck,
For her dividends

An orchard for fruit
Bees for their honey,
And stocks, besides,
For their dividends.

In short, a stock is worth only what you can get out of it. Cash, bonds, stocks and real estate all produce income and therefore have intrinsic value. This provides a logical basis for valuing these assets. Things like gold and bitcoin, on the other hand, have no intrinsic value. This makes them very tricky because they lack any logical basis for valuation.

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But in the preface to his book Unconventional Success, Swensen starts by saying that he "contemplated writing a different book." His original intention was to help individual investors employ some of the techniques he had been using at Yale.

What he found, though, was that the mutual funds available to individual investors had terrible track records: "...the data clearly pointed to the failure of active management by profit-seeking mutual-fund managers to produce satisfactory results for individual investors."

As a result, Swensen's book ends up recommending "equity-oriented, broadly diversified portfolios without the active management component." In other words, Swensen's recommendation to individual investors is the same as Ben Graham's. Despite his own success with active management, Swensen's advice is to stick with index funds.

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But near the end of his life, though, Graham made this surprising statement in an interview. He was asked whether he still believed in stock-picking, and this is how he responded:

"In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook 'Graham and Dodd' was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost."

Graham made this statement in 1976. I believe it is even more true today. Yes, you can make a fortune if you pick the right stocks, but for most investors, most of the time, I believe index funds are the better choice.

“Success is the product of unremitting attention to purpose.”

Disraeli wasn’t offering personal finance advice, but this principle certainly applies to managing one’s finances. All too often, I see people pursuing strategies that fall, generally, into the category of get-rich-quick schemes. Examples include chasing hot stocks, trading options and attempting to time the market.

In my view, though, most investors will be better served by a far simpler strategy: investing in a broad market index at regular intervals, through thick and thin. It’s not as much fun as those get-rich-quick strategies, but in my experience, productive investing is supposed to be a little boring.

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“The idea of caring that someone is making money faster [than you] is one of the deadly sins. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?”

Munger’s goal here isn’t to be preachy. Instead, he is offering practical investment advice. His message: It’s pointless to envy someone else’s financial situation. That’s because there will always be someone who is more successful, or more lucky, with their investments. And there will always be people who appear to be more successful.

A better approach: Make a plan, then tune out the noise. Never mind what your neighbor—or your brother-in-law—is doing.

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“Studying a specific person can be dangerous because we tend to study extreme examples—the billionaires, the CEOs, or the massive failures that dominate the news—and extreme examples are often the least applicable to other situations...The more extreme the outcome, the less likely you can apply its lessons to your own life, because the more likely the outcome was influenced by extreme ends of luck or risk.”

This is a very good point. We tend to hear about the extreme cases—Jeff Bezos, Bill Gates, Elon Musk, and so forth—because they’re the most interesting. But it’s of little use to draw conclusions from those outliers. To be sure, it’s far less interesting to study the habits of ‘ordinary’ millionaires, but it may be much more instructive as we look to build wealth.

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In The Psychology of Money, Morgan Housel writes:

“Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.”

There is, I think, a lot of truth to this. As we go through life, we definitely learn from our experiences—and that’s generally a good thing. But sometimes a financial experience can leave such an outsized impression that it distorts future behavior. Sometimes those experiences are positive, and sometimes they’re negative.

The key, though, is to recognize that, as Housel points out, they are very limited data points. The lesson: As much as it seems like the right thing to do to learn from experience, when it comes to financial experiences, you want to tread carefully.

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Folks who have served in the military are familiar with this quote from Ben Franklin: “If you fail to plan, you are planning to fail.”

When people think about financial plans, sometimes they’re put off, imagining a process that’s difficult and a document that’s lengthy. But it doesn’t need to be.

Author Carl Richards, in fact, is an advocate of the simplest possible plan—a concept he described in his book The One-Page Financial Plan. His message: Your plan doesn’t need to be literally one page, but the idea is that it doesn’t need to be 30 or 50 pages either. Ultimately, the heart of a financial plan is really just a simple and clear set of goals accompanied by a plan to start moving in the direction of those goals. You can always refine it further as you go along.

I sometimes describe the ideal plan as one that you could recite while standing on one foot. To be sure, there’s work that needs to go into it. But it should also be simple enough that you can keep it in mind for reference at all times.

What might that look like in practice? Here’s an example of a plan that is both robust and sufficiently simple:

You may be familiar with the so-called 4% rule, which is a guideline for sustainable portfolio withdrawal rates in retirement. Financial planner William Bengen first developed this research back in the 1990s, and over the years, he’s continued to examine the question from new angles.

When Bengen rolled out the first version in 1994, he made a simplifying assumption. In each of the scenarios he examined, he assumed the same asset allocation: 50% stocks and 50% bonds. That made sense because Bengen’s primary focus at the time was not on asset allocation but on withdrawal rates. In his new book, though, titled A Richer Retirement, Bengen considers other allocations. The results are extremely useful.

In looking at the full set of asset allocation options, Bengen found there to be an optimal range: Allocating between 45% and 75% of a portfolio to stocks led to the highest long-term sustainable withdrawal rates. Why? Allocations below 45% caused portfolios to lag behind inflation. Allocations over 75%, on the other hand, ran into trouble because they couldn’t recover from deep market downturns. But between 45% and 75%, Bengen found, an initial portfolio withdrawal rate of close to 5% would have been sustainable throughout a 30-year retirement.

This new data is helpful in two ways. First, it reinforces a point Bengen has always emphasized: that despite others calling it the “4% rule,” he himself never saw it as a rule. In his own work with clients, Bengen said, he regularly used 4.5%. And depending on other variables, such as the investor’s age, he felt that withdrawal rates could be even higher.

Another way this new research is helpful: It addresses a weakness in the traditional approach to asset allocation, which is that it tends to break down for higher net worth individuals.

Consider someone like Bill Gates. He could afford any asset allocation at all. If he held all his assets in bonds, the value of his portfolio would erode due to inflation, but because of its size, that erosion wouldn’t really affect him. For a similar reason, he could afford to keep everything in stocks. Market downturns would impact his portfolio, but never enough to affect his lifestyle.

While Bill Gates is an unusual case, I’ve found that this dynamic begins to apply even for “ordinary” millionaires. And while it might seem like a good problem to have, it does complicate the asset allocation decision because it means there’s no quantitative reason to choose one allocation option over another.

But with Bengen’s new research, investors now have a more tangible guideline. Even Bill Gates, the data tell us, should maintain an asset allocation within that 45% to 75% range.

Consider, for example, Netflix. In 2011, they made a decision to split their legacy DVD-by-mail business from their newer streaming business. In hindsight, the move makes sense. But they bungled the rollout. The result was that the company had to backtrack on the change. The CEO issued a public apology:

This was promptly mocked by Saturday Night Live:

Soon after, the company’s stock sank by more than 70% over a six-month period. But soon the crisis was behind them, and between 2012 and 2020, Netflix stock rose more than 5,000%.

This was a notable case, but there are lots of similar examples. The lesson: Don’t be too convinced when something looks completely hopeless—or when it looks absolutely flawless.