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.

In general, that is the case. At a mathematical level, stock prices represent the present value of all of the future cash flows that a company is expected to generate. So rising profits should translate to a rising stock price.

But that isn’t always the case, and that’s because expectations also play a part in stock prices. A company might be growing, but if it isn’t growing as fast as investors expect it to, then its share price could fall, even as its sales and profits grow.

That’s the danger with highflying stocks. Even when sales and profits might be rising quickly, stock prices can tumble when profits fall short of expectations.

This is among the reasons I don’t recommend trying to pick individual stocks. Not only does the company need to do well. It also needs to exceed expectations.

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“It ain’t so much the things that people don’t know that makes trouble in this world, as it is the things that people know that ain’t so.”

This is probably true about a lot of things, but it’s definitely true when it comes to the world of personal finance.

The other day, I described how Bill Bengen had trouble timing the market around the 2008 financial crisis, demonstrating that professional investors can get into as much trouble as individual investors when it comes to forecasting. That’s why I always advocate structuring portfolios such that—to the greatest extent possible—success is not reliant on forecasts.

Instead, structure your asset allocation around your own needs, with enough held in short-term bonds or cash to carry you through the inevitable—but unpredictable—downturns that can upset the stock market.

Financial planner Bill Bengen is known as the creator of one of the more well known ideas in personal finance: the “4% rule.” In an interview a while back, he described his personal experience with market timing during the 2008 financial crisis.

While many were caught by surprise when the market crashed in 2008, Bengen, impressively, says that he saw it coming: “I got my clients completely out of the market in late 2008. So they never suffered the losses that other folks did.”

But then came the hard part: “[In] 2010 I was starting to move back in but I never put them into a full allocation, which was a mistake. That was just a bad mistake on my part. I just didn’t have the process in place, didn’t know what to do. I had a good idea of how to get out of the market. But I didn’t have the other half of the process, which is essential, getting back in.”

That, in a nutshell, is why market timing is so difficult, and why I don’t recommend it. Even if you’re prescient enough to get one part of the trade right, it’s that much more difficult to get both right. That’s why I believe it’s better to choose an allocation and to stick with it, changing it only when your needs change, and not in response to an economic or market forecast.

But interest rates also affect the value of stocks. Warren Buffett explains why:

“A stock is the same sort of thing [as a bond]; it has a bunch of coupons. It’s just they haven’t printed the numbers on them yet…The value of this equity bond that in effect you’re buying you are buying when you buy it…you are buying something that over time is going to return cash to him…and those are the coupons.”

(See the full video below.)

The relationship between interest rates and stock prices, in other words, is the same as the relationship between interest rates and bond prices. The only difference is that stocks don’t carry explicit coupon payments in the way that bonds do. But all things being equal, rising interest rates will cause stock prices to fall, and falling interest rate will cause stock prices to rise.

In 2022, when both stock and bond prices both dropped simultaneously, it was precisely for this reason—because the Federal Reserve had raised interest rates so significantly and so quickly.

“How often should an investor rebalance? That’s a tricky question...Unfortunately, the best-performing rebalancing strategy varies from period to period, and it’s no easy task to predict which strategy will do best over your investing career.”

Piper makes a good point. People debate whether rebalancing should be done daily, monthly, quarterly, annually or on some other schedule. My own personal view is that an investor should rebalance only when his or her portfolio deviates by a specific percentage—for example, five or ten percentage points—and not on a specific calendar schedule. But I also agree with Piper’s overall conclusion on this topic: “...my suggestion is simply to pick one method and resolve to stick with it.”

The conventional wisdom is that you’ll certainly spend less, especially if your home is paid off and tuition obligations are behind you. But the key question is: How much less?

A 2005 study by a fellow named Ty Bernicke argued that the average 75-year-old spends 50% less than the average 45-54 year old. Because it was such a surprisingly large figure, this study is frequently cited. But others have criticized Bernicke’s methodology and believe that he is presenting an overly rosy picture.

What’s the solution? In my view, the best starting point for estimating a retirement budget is to work from your budget during your working years. Then go through your spending categories and make adjustments. While that might sound tedious, I believe the result will be far closer to reality than these very general studies. And there are plenty of tools that can make the task far easier. Among the most popular are YNAB and Monarch Money.

According to Morningstar data, the U.S. stock market has delivered positive returns in approximately three-quarters of annual periods historically. So the logical conclusion for an investor with surplus cash would be to invest it right away. After all, if the future looks like the past, you’ll have a 70%+ chance of making money over the coming year.

That’s the mathematical answer, but I see at least three reasons why you might still consider an incremental approach:

1. Regardless of what the math says about your ability to afford losses, no one likes to see declines. If you invest a substantial sum on Monday, and the market declines sharply on Tuesday, you will be unhappy. And even if the market eventually rebounds—as it always has—research by Daniel Kahneman tells us that it’s important to manage losses.

Prospect Theory was developed in 1979 by Kahneman and his colleague Amos Tversky. It’s famous because it took down one of the longstanding and fundamental pillars of economics—the concept that individuals will always seek to “maximize utility.” Contrary to the economics textbook, Kahneman and Tversky found that people look at potential losses and potential gains differently. For example, people dislike a $1 loss more than they enjoy a $1 gain. In fact, they found that it takes a gain of about $2 to offset a loss of just $1. In other words, people really dislike losses, even if the data tell us that they’re likely to be temporary. That is a key reason to consider investing incrementally.

2. There are periods when the market is inexpensive and periods when it is richly valued. If it’s near a high point, as it is today, that would be another argument for taking things slow.

3. A dollar-cost averaging program gives you the flexibility to accelerate your investments if the market declines.

Recognizing that there are valid arguments on both sides of this debate, I normally recommend a 12-month schedule for sums of cash that exceed 5% of your net worth.

In a notable event, Swensen once presented a guest lecture in Shiller’s classroom. The interaction and the discussion were remarkable. The entire video is more than an hour, but if you have time to listen to any part of it, I highly recommend it.

In his book One Up on Wall Street, Lynch wrote:

“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them.”

This is a key point. When it comes to investments, it’s easy to generate narratives—that is, to tell stories. That’s because there are so many variables that can impact any given investment in the future. Depending on one’s viewpoint, it’s easy to put more weight on some factors rather than others. This is only natural and to be expected. It’s only with the benefit of hindsight, in fact, that anyone knows which factors ended up being the ones that mattered most. For that reason, I think Lynch makes a good point here.

“I am amazed at how many people own stocks, they would not be able to tell you why they own it. They couldn’t say in a minute or less why they own it. Actually, if you really press them, they’d say, ‘The reason I own this is the sucker is going up.’ And that’s the only reason. That’s the only reason they own it.”

Lynch was referring here specifically to stocks, but the message applies to any investment. Among the reasons I think this is good advice: The better you understand what you own, the easier it will be to stick with it through the inevitable ups and downs.

You can find Lynch’s entire talk on YouTube.

Many individual investors wonder if they should try to do the same thing. But despite Swensen’s success, I don’t think it’s a good idea. There are four significant differences between an endowment and an individual:

• Ability: Swensen had an uncanny ability to identify the very best investment funds. This is tougher than it seems, for two reasons: First, fund managers are generally intelligent and tell a good story. Second, and more importantly, even unskilled managers can have a run of luck which may make them looked skilled. As a result, it’s exceptionally difficult to identify truly talented investment managers.

• Access: Yale has billions to invest. That, combined with Swensen’s reputation, gave him universal access to fund managers.

• Resources: Swensen had an entire staff and the resources necessary to conduct comprehensive due diligence.

• Tax status: High-octane funds have higher turnover and therefore higher taxes. As non-profits, universities don’t pay taxes, so they can more easily afford to be in funds like this.

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The book has been out of print for decades, but because of its universally accepted wisdom, used copies often sell for $1,000 or more on Amazon. Below is one of my favorite quotes from the book:

“Others mistakenly equate risk with volatility, emphasizing the ‘risk’ of security price fluctuations, while ignoring the risk of making overpriced, ill-conceived, or poorly managed investments…Risk simply cannot be described by a single number…I find it preposterous that a single number reflecting past price fluctuations could be thought to completely describe the risk in a security.”

This is an important point. Modern Portfolio Theory, which equates volatility with risk, is an interesting framework. And it did win a Nobel Prize. But in my opinion, it is more a textbook theory than a practical tool for managing portfolios.