Investing Rules

Decide what not to do

I’ve been investing for about a decade now. Feels a lot longer, and I have learned a huge amount by reading a lot, trying various things, and making mistakes. A lot of mistakes.

Running RetireJapan has also likely supercharged my learning and experience, giving me access to the wisdom of our community and forcing me to learn enough to answer the questions people have.

Now I feel pretty comfortable with my investing plan. It’s simple, largely rule-based, and I don’t have to think about it much.

Make mistakes and learn from them

Here is a non-exhaustive list of the mistakes I have made since I started thinking about investing. I don’t regret any of it, but if I had managed to avoid some of these I would be several times better off than I am now.

  1. Starting late
    I started getting serious about money, saving, and investing in my early thirties. If I had done so earlier, I would have made my mistakes earlier, and also wasted less money.
    Lesson learned: don’t put things off for later.
  2. Investing in a hedge fund
    A friend introduced me to a ‘trend-following’ hedge fund early in my investing career. It seemed exclusive and exciting, and the claimed returns were extremely attractive. I invested, paid huge fees, and more or less broke even when I would have doubled my money in the stock market.
    Lesson learned: don’t fall for the sales pitch.
  3. Trading
    Still early on in my career, I read about a Chinese internet stock online and bought some. Over the next few months the stock price zoomed up on some days, collapsed on others, and kept me glued to my computer screen refreshing the page and thinking about whether to sell or buy more. The damn stock took over my life. I checked it first thing in the morning and before going to sleep at night. After too many weeks of this I sold and doubled my money. It wasn’t worth it.
    Lesson learned: I don’t enjoy trading.
  4. Bitcoin
    In December 2017 I started experimenting with Bitcoin, Ethereum, and Litecoin. About a year later I gave up and sold out at a loss. If I had held until now, I would have doubled my money. Don’t regret it in the slightest.
    Lesson learned: I don’t understand cryptocurrencies.

My rules

I now have an investing plan I am comfortable with, based on a few simple rules.

Automation
Every month my wife and I invest set amounts into low-fee, diversified mutual funds. This gives us a good chance of building wealth over the long term. We set this up years ago and don’t really notice it happening any more.

Dividend shares and ETFs
If we have extra money (either from dividends accumulating in our accounts, from a bonus, or just randomly) we will buy things that pay a dividend. This is a small part of our portfolio. The aim here is to build up a monthly/annual income to supplement our pensions. We are not planning to ever sell these investments.

Tax-advantaged accounts
We invest in tax-advantaged accounts first and only once they are full we then invest in normal taxable accounts. iDeCo first, as it reduces our income taxes, then NISA for tax-free profits, and finally tax-reporting/deducting accounts to eliminate paperwork.

Following these three rules month in, month out, means that I rarely have to think about what to do with our savings/investments. Looking back (I keep a monthly spreadsheet of our assets that goes back to 2013) I can’t believe how much our net worth has grown over the last eight years. And we still have a couple of decades until we reach retirement age!

Once you save enough, you reach coast FIRE territory. We’re thinking about transitioning to that when my current job ends and we sell our school.

Investing regularly, in reasonably sensible, diversified investments, for a long time, without making big changes, really does seem to work.

The difficult thing is getting started, and figuring out your own rules. Once you do that it’s just a case of doing something sensible, regularly, for a long time.

12 Responses

    1. I saw that story. One reason I made my ‘never sell anything’ rule. With limited downside (stocks can only go to zero), unlimited upside, and a lot of diversification it makes sense to me to just hold onto things.

      1. Many years ago, early 2000:s I also used to also trade stocks, and wake up each morning to check my gains/losses it also took over my life. I did not make much in the end doing this… Also I had about 3,000 dollars in a company that just started to sell books online, it was hovering about 10 dollars for a long time, so sold out of it as it seemed to be going no where… wish I had held onto AMZN….

          2. Hi Ben, good read. I started at 40 and wish I had started earlier. My friend told me about mutual funds and I think I have been able to make up for lost time. Hope you will do a segment on taxes in retirement.

  3. You’ve done well if you’ve only invested for about a decade. Each of your lessons looks to have been learned with amounts you could afford to lose, so they didn’t impact your core investments.
    I’ve never taken the step of investing in cryptocurrencies, although I read stories about them. I recently heard someone describe cryptocurrencies with a different analogy than I’d ever heard: the person referred to them as cryptogold. This analogy seems more appropriate than thinking of them as currency. Like gold, the value of cryptocurrencies fluctuate much more widely than physical currencies. I’ve also heard about people who’ve forgotten or lost the access codes/passwords for their cryptocurrency, leaving them as wealthy but unable to access or transfer their wealth.

    1. It is a bit presumptuous of me to run this site, eh!

      We’ve been lucky I think in that we’ve had a high savings rate for a long time now, and have mostly stuck to sensible investments.

  4. Are you talking about me and GME in point 3? It’s taken over my nights, I have been waking up every 2 hours on Friday afraid I would miss the “squeeze”.

    I’m riding a little longer but never again after that. I might sell before it ends just to get rid of it at some point. I am getting exhausted from the lack of sleep.

  5. I have a somewhat similar story… Was lucky to have an advisor early on who was into buy and hold, but they only one making money was him. In 2013 I took control of everything and started finally getting the kinds of returns I read about.

    You provide amazing value to the community,

    David

  6. Ben,
    After hearing your experience with cryptocurrencies, I found this article informative. Since the article may not be accessible due to a paywall, I’ve pasted it below.

    https://www.nationalreview.com/2021/03/beyond-bitcoin-its-time-for-cryptocurrency-boards/?utm_source=Sailthru&utm_medium=email&utm_campaign=NR%20Daily%20Monday%20through%20Friday%202021-03-19&utm_term=NRDaily-Smart

    Beyond Bitcoin, It’s Time for Cryptocurrency Boards

    Steve H. Hanke
    March 19, 2021 6:30 AM

    When it comes to sound money, cryptocurrency boards beat Bitcoin.
    In 1999, Milton Friedman, the world’s foremost monetary luminary, foretold the rise of cryptocurrencies. Here’s what he had to say:

    I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A. The way I can take a $20 bill, hand it over to you, and then there’s no record of where it came from. You may get that without knowing who I am. That kind of thing will develop on the Internet and that will make it even easier for people using the Internet. Of course, it has its negative side. It means the gangsters, the people who are engaged in illegal transactions, will also have an easier way to carry on their business.

    More than 20 years after Friedman’s prediction, the speculative mania surrounding cryptocurrencies is breathtaking. Just consider that Bitcoin’s price has skyrocketed 1,030 percent in the past twelve months and that its market capitalization has soared to $1.1 trillion, which makes it the world’s sixth-most valuable asset.

    With Elon Musk’s announcement that Tesla would purchase $1.5 billion worth of Bitcoin in order to start “accepting bitcoin as a form of payment for [its] products in the near future,” the frequency of Bitcoin’s mentions on Google and its trading volume have risen sharply and in lockstep in 2021.

    Putting aside Bitcoin’s meteoric ascent in price, which has been punctuated by dramatic booms and busts, it is important to note that its designation as a “cryptocurrency” is a misnomer. A currency is characterized by four fundamental features. To qualify, it must be unit of account, must be a standard for deferred payment, must be a store of value, and must serve as a medium of exchange.

    Just how does Bitcoin stack up when it comes to these currency criteria? Bitcoin’s volatility turns out to be its Achilles’ heel. In 2020, Bitcoin’s annualized daily volatility was an astonishing 67 percent. If we look at the most important price in the world, the USD–euro exchange rate, and the world’s international currency, the U.S. dollar, the dollar’s annualized daily volatility in 2020 was only 7.8 percent. Since Bitcoin’s source code predetermines that Bitcoin’s supply will ultimately be fixed and totally inelastic, all market adjustments can take place only via price changes, not quantity changes. As a result, it is destined to be inherently subject to extreme price volatility. This means that Bitcoin will never serve as a reliable unit of account. You will rarely see items with Bitcoin price tags attached. You will also never see deferred contracts (contracts under which payment is made under a long-term credit arrangement) written in Bitcoin. Can you imagine someone writing a mortgage contract denominated in Bitcoin?

    Bitcoin’s volatility also renders it unattractive for most corporations to hold in lieu of cash reserves. Indeed, Bitcoin, which is considered an intangible (something, incidentally, that brings inconsistent and opaque accounting treatment in its wake), throws considerable risk on to balance sheets. In short, it is not a reliable store of value. It’s no surprise, therefore, that most corporations are unwilling to take on the risks associated with holding Bitcoin on their balance sheets. A recent survey found that roughly 5 percent of finance executives said that “they planned to hold bitcoin as a corporate asset in 2021” and “84 percent of respondents said they did not plan to ever hold bitcoin as a corporate asset,” citing volatility as their foremost concern.

    Furthermore, very few items are purchased with Bitcoin. Items are not only not priced in Bitcoin, but the transaction costs associated with Bitcoin are excessively high for both buyers and sellers.

    Bitcoin clearly falls short of meeting the four standard criteria to be designated as a currency. Accordingly, it should not be viewed as a currency but as a speculative asset with a fundamental value of zero. That being said, Bitcoin does have an objective market price. That price is determined by speculators operating in a whirlpool in which they are purchasing an asset with very little or no utility in the hope of selling it later at a higher price: greater fools and all that.

    If Bitcoin’s failure to meet the currency criteria isn’t bad enough, it even falls short of the aims of its architect (or architects), the pseudonymous Satoshi Nakamoto, who envisioned that Bitcoin would function as a currency. Nakamoto anticipated that Bitcoin would address three problems with “government” money, each of which Bitcoin fails to solve.

    First, Nakamoto asserted that Bitcoin would overcome the lack of trust associated with fiat monies issued by central banks. But Bitcoin, which is fiat, has a history defined by fraud and breaches of trust, illustrated by the Mt. Gox scandal. Second, Nakamoto designed Bitcoin to address privacy concerns. However, about 95 percent of all cryptocurrency trading occurs on centralized exchanges. These exchanges often collect identifying information from their users and have a history of failing to protect such information. Finally, Nakamoto complained of the “massive overhead costs” of commercial bank transactions that “make micropayments impossible.” Yet, due to technological limitations and fees charged by exchanges and crypto-payment providers, Bitcoin is impractical and too costly to facilitate most transactions. For example, popular cryptocurrency exchange Coinbase charges a “base rate for all purchase and sale transactions in the US [of] 4%.”

    Beyond Bitcoin, there is ample potential for innovation in private money, specifically a price-stable digital asset. Several attempts have been made, such as the popular stablecoin Tether and Facebook’s Libra, but these efforts have been fraught with problems. Tether claims to be “100% backed by our reserves.” However, in 2021 an investigation by New York Attorney General Letitia James found that “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie.” Additionally, as reported by Bloomberg, JPMorgan Chase & Co. strategists including Josh Younger and Joyce Chang wrote in a report that Tether has “famously not produced an independent audit and has claimed in court filings that they need not maintain full backing.” This is less than reassuring. Libra failed to establish itself in its original form, and, renamed and restructured, is supposed to be relaunched in the near future.

    Thanks to ease of entry and competition, inferior cryptocurrency products will struggle, in the end, to survive. Just look at Bitcoin. Although its market capitalization has skyrocketed, Bitcoin’s share of the total crypto market has fallen from 94 percent in April 2013 to 61 percent today. Eventually, Bitcoin’s current limited use value will likely be eclipsed by the offerings of superior challengers. So, just what might an effective competitor look like?

    It would be in the form of a private cryptocurrency board. A traditional currency board issues a currency that is freely convertible at an absolutely fixed exchange rate with a foreign anchor currency or gold. Therefore, under a currency-board arrangement, there are no capital controls. The currency issued by a currency board is backed 100 percent with anchor-currency reserves. So, with a currency board, its currency is simply a clone of its anchor currency. Currency boards have existed in about 70 countries, and none have failed — including the North Russian currency board installed on November 11, 1918, during the Russian Civil War.

    What all currency boards — past and present — have in common is that they are public institutions, but there is no requirement that currency boards be publicly owned. A private cryptocurrency board would be the ideal institutional arrangement for the crypto world. For example, its home offices and reserves could be located in Switzerland, a safe-haven financial center, and it could be governed under Swiss law. It could be operated with a small staff, as is the case with all traditional currency boards. As for its anchor, it could be a currency issued by a central bank, or gold, which is not issued by a sovereign. Furthermore, given its digital nature, the balance-sheet information of a private cryptocurrency board, including its reserves, could be publicly available and audited by independent auditors on a regular basis.

    With such a system, the crypto world would finally have a product that is more than just a speculative house of cards.

    Steve H. Hanke is a professor of applied economics at the Johns Hopkins University in Baltimore. He is a senior fellow and the director of the Troubled Currencies Project at the Cato Institute in Washington, D.C. Robert J. Simon is chief of the economic intelligence group at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.