All You Need To Know About Investing Can Be Written On A 3 x 5 Index Card (2024)

Everything you need to know about investing can be placed on a 3 x 5 index card. And it can be written on a single side. Here is the outline.

1. Invest as much as you can as early as you can. The operative word is "early." This is known as The Golden Rule of Investing.
2. Buy inexpensive non-managed index ETFs or mutual funds.
3. Stay away from individual securities unless you know what you are doing and have superior analytical skills for stock selection.
4. Pay off credit card debit each month so as to avoid interest payments.
5. Pay attention to fees by selecting commission free ETFs (or funds) with low expense ratios.
6. Cut costs by managing your own portfolio instead of paying management fees.
7. Max out your 401, 403, or similar saving opportunities. If granted stock options, diversify into low-cost ETFs and/or no-load mutual funds.
8. Max out your Roth IRA as taxes are likely to rise rather than shrink.

Guidelines or rules 2-8 become meaningless unless you stay disciplined and follow suggestion #1. William J. Bernstein lays it out starkly in Chapter 6 of his book, The Investor's Manifesto where he writes the following: "Each dollar you do not save at 25 will mean two inflation-adjusted dollars that you will need to save if you start at age 35, four if you begin at 45, and eight if you start at 55. In practice, if you lack substantial savings at 45, you are in serious trouble. Since a 25-year-old should be saving at least 10 percent of his or her salary, this means that a 45-year-old will need to save nearly half of his or her salary."

Start investing early and keep it simple. If there is a teenager or someone in their 20's reading this article, begin investing in SPY, VFINX, VTSMX, SPTM or some similar ETF or index mutual fund that covers the majority of the U.S. Equities market. Keep this up and don't deviate from this simple practice. At some point, likely after age 40, protection of capital begins to enter the savers thinking. What might you do to protect the corpus of your nest egg? Follow along for a possible solution.

Now we enter a period of the investing business plan that goes beyond the 3 x 5 card list of suggestions. Having lived through the recessions of 1967-1982, 2000-2002 and most recently, 2008 and early 2009, limiting losses becomes more important as the saving years begin to fade. I've written several articles on the Dual Momentum model developed and clearly explained by Gary Antonacci in his book by the same title. The Dual Momentum model is one investing style one can use to limit losses.

The Dual Momentum model is quite simple to put into practice. Select three asset classes as a starter. In the example below I am using U.S. Equities (SPTM), International Equities (SPDW), and U.S. Bonds (SPAB). In addition, I've add two treasury ETFs - (SHY) and (SPTL) - for periods when bonds might be out of favor and a more conservative approach is merited.

I use a spreadsheet known as the Kipling to perform all the required calculations. Rank SPTM and SPDW against SHV, a low volatile ETF. If both SPTM and SPDW rank above SHV, invest 100% of the portfolio in the higher performer between SPTM and SPDW. Find commission ETFs or mutual funds at the broker where you have your account. I am using SPTM and SPDW in this example for portfolios housed with TDAmeritrade.

Should neither SPTM or SPDW rank above SHV, then place 100% of the portfolio in bonds or SPAB. This is one place where I deviate from the Antonacci Dual Momentum model. I've added SHY and SPTL as potential ETF options to the "investment quiver."

Dual Momentum Portfolio: Below is a sample portfolio one might use to implement the Dual Momentum model. Keep in mind that the DM model is one simple way to protect capital or limit losses to the nest egg you have been building over many years.

Current Dual Momentum Recommendations: With an investment quiver that contains only five investment arrows, the Kipling currently recommends placing 100% of the portfolio in the U.S. Treasury ETF, SPTL. While one might be wary of placing 100% of a large portfolio in a single security, keep in might that ETFs or mutual funds provide broad diversification.

Gary Antonacci's Dual Momentum book was published in 2015 and I learned of it shortly thereafter. Therefore, I have limited experience with the investing model. Currently, I am tracking four different portfolios using the Dual Momentum model. I am following the recommendations as they emerge from the Kipling spreadsheet.

None of the eight suggestions that fit on a 3 x 5 card are violated by the Dual Momentum model. In bull markets, one is invested in either U.S. Equities or International Equities. Generally, it is the former. In bear markets, one is invested in either U.S. Bonds or U.S. Treasuries. These lower volatile securities are havens designed to protect capital. During deep declines there may be periods when the Kipling recommends cash or SHV.

If the Dual Momentum model lacks diversification, which might be true for some investors who are managing very large portfolios, the Kipling spreadsheet is set up to handle up to 40 securities in a single portfolio. I'm tracking numerous portfolio that are designed to broaden the diversification beyond what one sees with the Dual Momentum model. Such examples are beyond the scope of this article.

Write the eight suggestions listed above on a 3 x 5 index card and keep them in mind as you save and build your portfolio.

Lowell Herr