How to Invest in the Stock Market and Beat 80% of All Investors

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First of all, we only allocate 25% to stocks in our permanent portfolio. The permanent portfolio uses four different asset classes and we initially limit our exposure to 25% in each asset class. Then, we rebalance the entire portfolio when an asset class hits a rebalance trigger of 35% or 15%. Stocks are our hedge for prosperity, but we also have inflation, deflation and recession hedges in our permanent portfolio. The different asset classes we use are stocks, bonds, cash, and gold and these asset classes react differently depending on what's going on in the economy. So by using a permanent portfolio we will always have at least one asset class that is doing well. The permanent portfolio has gained over 8% per year, compounded over the past 40 years with low volatility.

Here are the specifications for investing in stocks for our permanent portfolio:

  1. We avoid individual stocks because of their risks and the trading costs involved. Company stocks are also individual stocks, so we also limit our exposure to risk. We've also eliminated the need to research individual companies and select stocks, freeing up a lot of personal time to do the things we enjoy. The permanent wallet is really low maintenance.

  2. We also avoid actively managed mutual funds because over 80% of them can't even beat their benchmark like the S&P 500.

  3. We want to use a total market cap weighted index fund with low fees. Since there are so many companies represented in these funds, we get great diversification and less risk than stocks of a single company. Since few transactions are made in the fund, we also achieve high tax efficiency.

  4. All dividends received from our fund that we allocate to our cash allocation we deactivate any dividend reinvestment plan (DRIP). This is in line with our permanent portfolio strategy of buying assets at a low price and selling at a high level.

If you live in the United States, you might want to explore the use of exchange traded funds that have low fees. Some of these exchange traded funds you can even buy and sell commission-free from some discount brokers. I have listed a few exchange traded funds here, but there are others available from Schwab and Fidelity for example. There are also regular total stock market mutual funds available if you prefer. If you live outside of the United States, there are also a total of stock exchange funds available in your country.

Examples of US ETFs:

  • Vanguard Total Stock Market Index Fund (VTI) with a management expense ratio (MER) of only 0.05%

  • IShares Russell 3000 Fund (IWV) with a MER of 0.20%


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