I've been meaning to write an article about money management, because it's something I've been thinking about a lot, and because most people I know are at that point in life when they need to figure it out. There are a couple ways to go. You can hire a money manager and pay them money to manage your money, or you can try and pick stocks yourself. Both are popular approaches, and both are really bad ideas for just about everyone.
I spent a number of years out of undergrad picking and buying stocks. I was a big fan of The Motley Fool, I read just about every book on investing out there, from Benjamin Graham to Warren Buffett to Peter Lynch to Burton Malkiel. I built spreadsheet models in which I keyed in income statements and balance sheets off annual reports and 10-Ks and 10-Qs, listened to any available public conference calls, subscribed to the Investors Business Daily and The Wall Street Journal, etc. Most importantly, I used all that info to invest money in individual stocks.
And I did alright. Over the years, I've come out ahead. But I'm smart enough to recognize I wasn't necessarily all that smart. For the amount of time I put in, I earned a bit more than I might have if I'd put all my money in an S&P 500 stock index, but a lot of that resulted from my interest in and overinvestment in technology stocks, which were hot. And what a time suck! There's a small part of me that still thinks if I spent enough time, I could pick a few winners. But it would have to be my sole endeavor in life, and who wants to spend their days and nights picking stocks? Seriously, it was a sad hobby. Spending time trying to make more money--that's what bankers do, and I bet most of them have mid-life crises.
Yeah, but aren't bankers wealthy, you might ask? What's wrong with making a few bucks? I have nothing against wanting to take care of you and your own. There are ways to do it, and it doesn't require a lot of time or effort, and for 99% of the world it will make more of your money than almost any other strategy, including those which require a ton of your time. You don't have to hire a money manager, who would charge you thousands of dollars to do roughly the same thing.
This strategy is based on Modern Portfolio Theory, an idea which won a Nobel Prize. It recognizes that the bulk of your expected investment return is easily traced to a few very controllable factors. I've been using this strategy for a while now and it works great. I don't spend much time worrying about it every year. Picking individual stocks? I gave that up when I started working at Amazon, a job which more than fills my days. No money manager takes my money, which is great, because I have enough bills to pay.
All it takes is some basic understanding of asset allocation. I'll write more about it tomorrow, and I'll even list all the index funds and other financial instruments which I use to implement the strategy. If you don't believe me, I'll list the three or four investment books which back me up. They're the only ones you'll ever need to purchase on investing again. And someday, when you're retired and getting a tan on the beach while on a vacation that you paid for using my strategy, you'll think, "That was the only piece of good advice I ever got from that bum."
So check back in, and I'll try to summarize all you need to know in the next week or two. One of my goals this year is to try and make my website a bit more valuable to visitors, and this is phase one: make y'all lotsa money.
By the way, on the topic of economics, most baseball fans think a salary cap would be a good idea, especially since it seems to drive competitiveness in football. The folks at Baseball Prospectus point out why that's a fallacy. Smart guys over there, and they just published their latest Baseball Prospectus, something I buy every year.