I’ve been investing for the better part of two decades now. I’ve managed a sizable portfolio through two historic bear markets and spent countless hours reading every book, blog, and article I could find on investing and personal finance. During that time I’ve examined nearly every strategy and wealth-building scheme that’s crossed my path.
In the end, I’ve found just three approaches that I feel offer a reasonable chance of providing strong returns over the long haul for most people. Here they are:
- Total return/passive index investing: This is mainstream investment philosophy, simplified for the average investor, and with expensive financial advisory services removed. It can be implemented by buying as little as three or four low cost mutual funds or ETFs that represent the entire market. Its essence is to just buy and hold them. This is the strategy that I use, and write about. It requires the least amount of time and expertise to implement, has moderate risk, and is still the best choice for the majority of investors, in my opinion.
A downside is that you don’t always get steady income. The total return part means that you own both income and growth stocks. That means, over time, you can’t live simply off income but must harvest a portion of your principle as well, using a safe withdrawal rate. Another downside is that, depending on your asset allocation, you are more or less subject to stock market swings. Though that can be largely avoided by holding a sufficient allocation of bonds and other assets that move differently from stocks. The huge upside is that this strategy is simple and low-maintenance: it offers the average investor the best chance for success.
- Dividend/value stock picking: This is the investment philosophy established by Benjamin Graham and others, and popularized in our era by Warren Buffet. It involves buying stocks whose price appears to be undervalued by an analysis of fundamentals like financial statements, management, competition, and markets. The essence of value investing is buying stocks “on sale,” at less than some expected intrinsic value, which theoretically provides a margin of safety. (For example: If you get a great deal on a used car, you might not mind spending a bit more on repairs, if necessary.)
Many studies have shown that value stocks outperform growth stocks over the long term. They also have the wonderful property of paying higher regular dividends. So you can get a steady stream of income without having to sell holdings. The downsides of value investing are that it requires more skill and time to implement, and there is danger of taking on risk through lack of diversification. There are plenty of value funds and ETFs available, but it is difficult to maximize your income without picking individual stocks. And those tend to be concentrated in volatile industries like banking and energy. Another concern is that you must have the discipline to hang on to your value stocks for the very long term, to see all the expected rewards.
- Real estate rental property: This might be the oldest and most accessible of my three favored investing strategies. Since recorded time, people have owned property and rented out rooms, or apartments, or cottages. They might not even have considered themselves “investors.” In fact, rental real estate is as much a business as it is an investment.
And therein lies the downside. Property, and people, require maintenance. Property needs repairs and replacements, and taxes and insurance must be paid. People need contracts, and meetings, and reminders. You can do property maintenance and management yourself if you have the skills and inclination, but the cost and trouble may be considerable. Or you can hire somebody to do it for you, but give up some profit in the process.
A well-chosen rental property is relatively low risk. The primary downside is vacancy: going without tenants. A more obscure risk would be liability issues that could plague a landlord. But, for the majority of people so inclined, owning rental property is one of the surest ways to build wealth. The steady income is appealing. Total returns can trump what’s available in the stock market. And when credit is tight and real estate is down, rental property can be an even better investment.