Ben Franklin's Timeless Guide to Stock Investing
If you're looking for the secret to investing, I’m confident that for most American families, the answer is surprisingly simple. It involves owning your stocks through a broad market index fund, like one that tracks the S&P 500, and your bonds through a total bond market index fund. Warren Buffett agrees, stating that for most people, the best way to own stocks is through a low-fee index fund—a path that will almost certainly beat the net results of the majority of investment professionals.
While this index-driven strategy might not be the single best plan ever created, the number of strategies that are worse is practically infinite. It's a reliable approach for anyone wondering without getting lost in the noise.
Cutting Through the Fog of Investing
The world of finance is surrounded by a dense fog of uncertainty. We can never truly know what returns stocks and bonds will deliver in the years ahead. But that doesn't mean we're navigating blind. There are fundamental truths we can rely on.
We know we must start as early as possible and contribute regularly. We know that investing comes with risk, but we also know that investing is a guaranteed path to financial failure. The key is understanding where returns come from and managing the risks you can control. The beauty of through a total market index fund is that it eliminates the risk of picking the wrong individual stocks or fund managers. You're left with only market risk, which is the price of admission for long-term growth.
More importantly, we know that costs and taxes are relentless drags on your returns, and minimizing them is crucial. The idea of consistently beating or timing the market is a fantasy; what might work for a few cannot possibly work for the many. True wisdom in starts with knowing what you don't know.
Timeless Wisdom from an Unlikely Source
As I reflect on these ideas, I see a remarkable parallel with the timeless wisdom of Benjamin Franklin. The principles of sensible saving and haven't changed much in a few hundred years.
Franklin famously said, “If you would be wealthy, think of Saving as well as Getting.” This mirrors the modern imperative that failing to invest is a surefire way to miss your financial goals. Time is your greatest ally, and the magic of compounding is a force you want on your side.
Franklin’s warning, “Beware of little Expenses; a small Leak will sink a great Ship,” is the perfect analogy for investment fees. Your net return is simply your gross return minus costs. Minimizing those costs is one of the most effective things you can do to improve your long-term results in .
“There are no Gains, without Pains,” Franklin noted. Similarly, you must invest. The biggest risk isn’t short-term market volatility; it’s the long-term risk of your money not growing at all.
Franklin believed, “One man may be more cunning than another, but not more cunning than everybody else.” This perfectly captures the folly of trying to outsmart the market. No one knows more than the market itself, and acting on an “insight” that millions of others already share is a losing game.
Finally, Franklin’s advice on perseverance is perhaps the most important: “Industry, Perseverance, and Frugality make Fortune yield.” For investors, this means staying the course. No matter what the market is doing, patience and consistency are your most valuable assets.
The Simple Path to Building Wealth
The way to build wealth is twofold: harness the magic of long-term compounding returns and avoid the tyranny of long-term compounding costs. The financial services industry often operates on the motto, “Don’t just stand there—do something!” But for most of us, the best advice for successful is the exact opposite: “Don’t do something—just stand there!”
Clifford Asness of AQR Capital Management compared it to dieting. We all know the simple formula is to eat less and exercise more, but it’s not easy to do. Investing is the same. The advice is simple: diversify, keep costs low, rebalance with discipline, and save more. For anyone , the goal should be to do no harm.
These straightforward ideas truly work. The classic index fund should be the core of any winning strategy, providing a simple, effective way to get your fair share of whatever returns our businesses generate. By following these commonsense guidelines, you can position yourself to be a winner in the long run.
