- Control What You Can:
Don't waste time trying to outguess the professionals.
They may or may not be better than you, but
they get their money on trading, not investing.
The things the Lazy Investor can truly control
are Taxes, Investment Costs, and Risk. Control
Taxes by making more trades in your non-taxable
accounts, like your 401k, and fewer trades
in your taxable accounts. Control Costs by
investing in funds with the lowest cost or
expense ratio, like Index Funds. Control
Risk by staying diversified. Never put too
many eggs in one basket.
- Save What You Can:
Nothing gets you ahead faster than saving.
Some people are never able to save unless
it comes out of their paycheck before they
can spend it. Live on 90% of your income
and save, save, save the other 10%...or more.
Don't ever get ahead of this.
- Discipline:
Once you have your Lazy plan written down,
put it into action. Set it up once and then
relax. But do it. Then, make your adjustments
exactly as planned. Stay the course. Being
out of the market for just one day can be
a big setback.
- Look at the Big Picture:
Don't look at just one account. Consider
all of your investments, including your house.
If both you and your spouse will enjoy the
fruits of your savings and investments, consider
all accounts as one. The Mountain Method
won't work if the peaks of one account counteract
the valleys of the other.
- Be Honest With Yourself:
Admit your mistakes and don't rationalize
your decisions. Take all emotion out of your
investing. Go ahead and watch the market
go up and down, but don't suddenly ignore
the rules. If you're a worry-wart, go ahead
wring your hands, but know that every peak
and valley is to your advantage, just don't
react to them. Instead, react when your Mountain
Method says to react.
- You Need More Than One Investment
The Mountain Method takes advantage of the
fluctuations among different investments
at different times. If you choose a "Life
Cycle" or "Balanced" fund,
you're defeating those advantages. Ideally,
the best combinations of investments are
those that move contrary to each other.
Very few of us have the time, resources or
luck to choose just the right investment
to succeed, but you can benefit from the
market's variations.The Mountain Method does
that by taking advantage of the market's
"peaks" and "valleys".
Each of our steps apply to whatever kind
of "market" you want: stocks, bonds,
real estate, or ancient Chinese water vessels.
Over time they all fluctuate. This way you
can "buy low-sell high", and not
have to time the market to do it. And only
need to attend to your account once a year.
- How Does It Work?
The Mountain Method involves balancing out
all your investments once a year. Yes, you
could do it more often, but no more than
once a quarter. Historically, a once a year
adjustment is among the best strategies.
On that "readjustment" date, you
need to take a moment to chip off the tops
of your gainers (the "mountains"),
and add those funds to your losers (the "valleys").
Don't worry about timing, prices or market
mania, and don't use this date to pull some
money aside. If you miss just one day of big market gains, you could miss
a whole year's worth of success. If your
winners are up 5%, sell that much and add
it all to your other, less successful investments.
This is also called "asset allocation"
or "rebalancing", but thinking
about it as the "Mountain Method"
helps you focus on how the peaks and valleys
work to your benefit.
- Assemble a Simple Portfolio
Let's consider our Balance Adjustment happens
only once a year and work with some really
general numbers. Consider a retirement account with $50,000
and two funds: a Stock Index Fund and a Bond
Fund. The Lazy Ratio is almost always 60/40:
60% stocks and 40% cash, but check the FAQ for additional ratio guidance. We're too lazy to pick individual stocks,
so let's choose a low-cost, no-load mutual
fund (a "load" is a commission...don't
pay one!). "Cash" in this example
is in Bonds. They are less risky than stocks
and can grow when your stocks don't. Your
Lazy Portfolio should have $30,000 in the
Stock Fund (3,000 shares at $10 a share),
and $20,000 in a Mid-term Bond Fund (2,000
shares also at $10 a share).
The Mountain Method Simple Portfolio-$50,000
| Investment |
% of Portfolio |
Balance on Day 1 |
Balance After 1 Year |
Readjusted Balance |
| Total Stock Fund |
60% |
$30,000 |
$33,000 |
$32,400 |
| Bond Fund |
40% |
$20,000 |
$21,000 |
$21,600 |
| Totals: |
100% |
$50,000 |
$54,000 |
$54,000 |
|
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- Doing the Math
Take a detailed look at what happens over
3 years. The markets go up and down, and
in this example your portfolio value goes
up even if the stock market doesn't.
- At the end of one year, let's say your Stock
Fund has grown to $33,000 (3,000 shares at
$11 a share), and your Bond fund has grown
5% to $21,000 (2,000 shares @ $10.50 a share),
for a total portfolio of $54,000. You've
had a pretty good year. To rebalance to 60/40,
you need to withdraw $600 (54.5 shares) from
your Stock Fund (sell) and deposit it (57.1
shares) in to your Bond Fund (buy). Then
stay away from your account for another year.
- Then, at the end of year 2, stocks have not
done well. Your Stock Fund is down to $26,000
(2,945.9 shares @ $8.83 a share), and your
Bond Fund is only up another 5% to $22,600
(2,054.5 shares @ $11 a share, for a total
of $48,600. Without thinking about what the
market might do next, your discipline says
you must take out $3,160 (287.3 shares) from
the Bond Fund and place it (357.9 shares)
in the Stock Fund. What you have done is
purchased stock at a cheaper price, and some
of that money ($600) was made the year before
in profits from your stocks.
- At the end of year 3, Stocks are right back
where they were at year one, at $10 a share.
But now you have 3,357.9 shares. That's $33,579.
The Bond Fund is growing at a boring rate
of 5% a year, so your Bond Fund is now worth
$11.55 a share, and with 1,769.8 shares,
a total of $20,441. Your portfolio is now
worth $54,020. If you hadn't Rebalanced,
your stocks would only be worth $30,000 and
your bonds $23,000, or a total of $53,000.
The Mountain Method has put you ahead by
$1,020, that's about 2% better, and that's
without any changes in your stock prices!
Now, with more shares in your Stock Fund,
should stocks really take off, you'd make
even bigger gains. These figures do not include
dividends on the Stock Fund or any contributions
you might make to the funds, such as a monthly
payroll deduction.
- Over a period of years, this difference can
be substantial. And if you were to choose
a few different investment sectors, they
could have even more variations in their
peaks and valleys, and the improvement can
be really great. Yes, it's that easy...and
Lazy!
- Now let's make even bigger returns by adding
money and dividing up our investments into
more sectors: The Advanced Mountain Method.
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