By Dr. Jim Dahle, WCI Founder
Sometimes investing hobbyists like myself, especially after a decade or more of investing, assume everybody knows the basics of investing. Occasionally, I am starkly reminded that is not the case. I refer to these somewhat egregious errors as “violating Investing 101”. Today, I'd like to go on record about what I think everyone should have learned in Investing 101.
Don't Buy Investments You Don't Understand
This one seems so obvious when you say it like that, but it is an incredibly common thing that people do.
“I didn't know that investment could do that.”
“I didn't know there was a surrender fee.”
“I didn't really understand how that worked.”
“I didn't understand the tax consequences of that investment.”
Every day I run into somebody who has purchased something they didn't understand, and it isn't always whole life insurance.
Limit Speculation with Your Investments
Investments that don't generate income are speculative and should make up a very limited, if any at all, part of your portfolio. The classic speculative investment is empty land. You know, a real estate investment that not only doesn't provide any income but actually has expenses like insurance and property taxes. Gold, Yen, Bitcoin, and Beanie Babies are also speculative. If you want to put some small part of your portfolio (<10%) into stuff like that, that's probably fine. But I don't put any of my portfolio into speculation. That's serious money I carved out of my income and didn't spend. I'm not going to just play with it. I've got hobbies that are way more fun than that.
Higher Investment Risk Is a Necessary But Not Sufficient Condition for Higher Returns
Lots of people have heard the old adage that higher risk = higher returns. While there may be a correlation there, it certainly isn't always true. Some risk isn't compensated. There are plenty of risky investments out there with low, zero, or even negative expected returns. Don't buy those. Think Roulette. It's high risk, right? So there must be a high return, right? No. The expected return is negative on roulette. That's why it's in a casino. Casinos don't have games with positive expected returns.
Diversify Your Investment Portfolio
Another obvious one, right? But people don't do it. I had someone complain recently that their $100,000 crowdfunded hard-money loan was in foreclosure. That's a known risk of hard-money loans, and some percentage of them will go into foreclosure. But crowdfunding sites generally only require you to invest $2,000-$5,000 into debt investments. Why would someone put $100,000 into a single one? I guess if you had $3 million in crowdfunded hard-money loans, then maybe it's not a big deal. But if you only had $100,000-$200,000? To put 50-100% of your investment into a single security? You just failed Investing 101.
It's so easy to buy all the stocks in the world at a cost of 4 basis points a year. There's no reason to have a portfolio consisting of a handful of stocks. We call that uncompensated risk, and nobody is going to pay you for it.
There might be two schools of investing. One is to not put all your eggs in one basket. The other is to put all your eggs in one basket and watch that basket very closely. But watching it closely means you need to be on the board of the company. The person in charge of whether your investment is successful should probably have been a guest at your dinner table if you're investing more than 10% of your portfolio in that company. I've got more than 10% of my net worth tied up in WCI, LLC. Is that risky? Sure. Am I watching that investment closely? More closely than anyone else in the world. That's the sort of watching you need to be doing to bear concentrated risk, and even then, it might not be a good idea.
Invest When You Get the Money
Timing the market is hard. It's so hard that I'm confident far more money has been lost trying to time it than has been made successfully timing it. Obviously buying low and selling high is ideal. But it's incredibly hard. The next best thing—buying all the time—is very easy. Successful investors buy all the time. You earn money at your job, you carve a portion of it out to invest, and you invest it. Right then. If you happened to buy high? No big deal. Because you did the same thing last month, last year, and last decade. And you'll do the same thing next month, next year, and next decade.
Eventually, you'll have bought both low and high, and in the long run, you'll be rich. Time in the market matters more than timing the market. There are lots of people out there advocating a “Dollar-Cost Average” (DCA) approach to investing a lump sum. But guess what? Every day you leave your money invested, it is just like you lump-summed in that day. So you might as well just invest any lump sum you happen to have right now. If you're nervous to put your lump sum in the market all at once, how is that any different from the day after you finish your one-month, six-month, or one-year long carefully calculated DCA process? It isn't. Just invest.
If You Must, Be a Contrarian
Some people just can't put it on auto-pilot; they can't resist timing the market. Well, if you must time the market, try to do the opposite of what the crowd is doing. Don't buy something right after it went up 1800% in the last year. Don't sell something because it just went down 75%. Do the opposite. It won't feel right, but in the end, it's far more likely to be right.
Don't Catch a Falling Knife
While we're on that subject, remember that just because something went down a whole bunch, that doesn't mean it will go back up any time soon, and vice versa. There is a certain amount of momentum in investing, but it's awfully hard to get it right. See the above section about “investing when you get the money”. It's wonderful to own a good investment, but the difference between a good investment and a bad investment is often just the price you pay for it. Would you like to buy a nice property with a great tenant that has a net operating income of $8,000 per year? Sure, if it costs $100,000, but not so much if it costs $300,000.
Past Performance Does Not Guarantee Future Performance
Your natural tendency as a human being is to look at what did well in the past and buy it. When it comes to picking stocks, mutual funds, or asset classes, that is usually a recipe for underperformance. This is such a truism that mutual funds are required by law to put it in their paperwork. In fact, there is a phenomenon often called “mean reversion” which suggests that asset classes that have done poorly in the recent past are likely to do better in the near future. You can really see that at play with this chart.
Spend a second with this, because it's important. Basically, each color is an asset class represented by a given market index. Notice that how it did last year really has nothing to do with how it did this year compared to other asset classes. Some asset classes are riskier than others. For example, the orange one is emerging market stocks, like companies in China and India. Note how it is usually either the top performer or the biggest loser. The point is you don't know what asset class is going to be on top next year, so buy them all. In a reasonable portfolio, every asset class will have its day in the sun and its night in the doghouse. But switching from one to another chasing performance is a good way to spend most nights in the doghouse.
Better Have a Good Reason to Not Use an Index Fund
The data supporting the use of passive investments, like low-cost index funds, instead of actively managed funds in the publicly traded stock and bond markets is so strong that you better have a darn good reason to choose an actively managed one. Good reasons include things like, “There is no index fund in this asset class” or “My 401(k) doesn't offer index funds”, not “I found an actively managed fund with a track record of beating the index fund for five years straight”. That happens just by chance and probably won't repeat.
Stop Playing When You've Won the Game

Why do my kids know more than you about investing? Because they've taken Investing 101.
Investing is a single-player game. The object of the game is to reach your own investing goals. You don't need to beat the market or your brother-in-law or that guy at the water cooler. Ideally, you take on only enough risk to have the best possible chance to reach your goals and no more. If you receive some good fortune, such as strong returns or an inheritance, there is a lot of wisdom in dialing back the risk a bit.
Careful Adding New Asset Classes to Portfolio
If you're going to add a new asset class, make sure it has good returns and a low correlation with the rest of your portfolio. And make certain it's an intelligent investment on its own, not just when combined with the rest of the portfolio. Beware performance chasing. I can look at a Boglehead's portfolio and pretty much tell you what year the owner joined that forum. Small value tilt? 2001-2005. REIT tilt? 2005-2007. Three Fund Portfolio? 2009-2015. Good investing books in the late '90s recommended a tech fund. Ibonds, TIPS, momentum funds, fundamental indexing, peer-to-peer loans, cryptocurrencies—they've all had their day in the sun. Don't kid yourself when adding new asset classes; you're probably performance chasing.
Rebalance Every Now and Then
Intermediate investors are fixated on rebalancing. They come up with mantras like, “It isn't buy and hold; it's buy, hold, and rebalance.” Rebalancing doesn't make that much of a difference, and it often hurts portfolio performance. For that reason, academic studies suggest rebalancing every 1-3 years is ideal. But never rebalancing is a rookie mistake. Investing 101 teaches that you should rebalance your portfolio every now and then.
There Are Many Roads to Establishing a Successful Investment Portfolio
I've met thousands of successful investors online and in real life. Not one of them followed the same exact path. What that tells me is that you need to pick something reasonable, fund it adequately, and stick with it. Don't get dogmatic about your own investing method or asset allocation. It's probably not much better than the next guy's portfolio and could be a little worse. The difference between 5% REITs and 10% REITs isn't going to have much of an effect on your retirement date, and no one can predict which allocation will hasten it and which will delay it.
Sometimes There's a $20 Bill on the Ground. Pick It Up.
There's an old joke about an economist walking with one of his students who points out a $20 bill on the ground. The economist doesn't believe it. Well, every now and then, there actually is a $20 bill lying on the ground. Pick it up. It won't be there for long. A few times in your investing life (and more frequently in your business life), you'll run into this sort of a situation. At first, you'll think it's a scam, but as you look into it, you'll realize it's almost free money. Take it. Maybe someone wants your house, boat, or car more than you do. Maybe it's a property being sold by a busy heir who doesn't know or care what it's worth. Who knows? But just like there are really bad deals out there, there are really good ones too.
Stay the Course in Bull and Bear Markets
Beginner investors don't stay the course in a bear market. Intermediate investors don't stay the course in a bull market. Successful investors do both.
Don't Mix Investing and Insurance
Some products are made to be bought, but many are made to be sold. A large quantity of those are sold by insurance companies and their representatives. The agent will tell you it isn't an investment. Believe him, and walk away.
Use Retirement Investment Accounts
When given the choice, invest preferentially in tax-protected and asset-protected accounts. Hint, that choice is a lot more common than most people realize. An HSA is your best investing account. You can still use a Roth IRA after you start making the big bucks. You can have more than one 401(k). Don't fear the age 59 1/2 rule, there are lots of exceptions to it, including early retirement.
Don't Let the Tax Tail Wag the Investment Dog
Don't be so tax paranoid that you forget the goal isn't to pay the least amount possible in taxes. The goal is actually to have the most after paying them.
Costs Compound Just Like Returns
Cost matters, and it matters a lot, especially over long time periods. Every beginner investor knows about the magic of compound interest. Too few realize it applies to all their costs, too. A 1% AUM fee really adds up over decades.
The Majesty of Simplicity in Your Investment Portfolio
Simple, low-cost portfolios often beat complex, higher-cost portfolios, especially when you add in the cost of your time. Be cautious when adding complexity and cost to your portfolio. Like reaching for something that isn't an index fund, you'd better have a very good reason to do it.
The Investor Matters More Than the Investment
The most important determinant of your investing success is your own behavior. Are you saving enough? Can you stick with your investing plan? Can you limit yourself to a reasonable withdrawal rate in retirement? Can you avoid performance-chasing, greed, and fear? That all matters a whole lot more than a few basis points in fees or extra return.
There you go, Investing 101. Learn it from me or learn it in the school of hard knocks. But eventually, you will learn it.
What do you think? What else belongs in Investing 101? Comment below!
[This updated post was originally published in 2018.]
I refer my med student’s to your website often, good to have something super simple like this to link to.
Gracias, yo
Thanks for the helpful reminder. This is a great article to point someone to in the beginning.
I can’t count t the number of times I’ve started having a basic conversation about a colleagues 403B or 457 and watched their eyes glaze over. I always forget that there are still a ton of people out there who literally choose (some intentionally) to know nothing about investing and personal finance.
TPP
Nice summary. As I was preparing a talk to the residents on personal finance I stumbled on Warren Buffets million dollar challenge. Around 2008 or 2009 after things settled down a bit he bet the financial services industry that an index fund of his choice would best any actively managed hedge fund who dared accept the challenge. Only one guy accepted and he lost so badly that they ended the competition early. This was during the crazy bull run of the last decade!
There are plenty of ways to reach financial independence but lots cost, diversified, index fund investing has to be the easiest and least time consuming method for a physician. Primers like this one and a good financial book are great resources to learn the basics needed not to screw it up.
They didn’t end it early, but it was pretty obvious early on who was going to win. They actually doubled down on it I think. It’s all over now though.
It was a ten-year bet where the S&P 500 returned 7.1%, annualized, and the competing basket of funds returned 2.2%, annualized. The payoff ended up being over $2M because the bond that the parties posted to cover the bet had better than expected returns over the course of the wager, not because they doubled down. The bet covered the 2008-2009 bear market where most talking heads on TV would decry buy-and-hold indexing and claim “it’s a stock picker’s market.”
http://fortune.com/2017/12/30/warren-buffett-million-dollar-bet/
MORE EXCELLENT ADVICE AND WRITING. Who so many cannot understand the mere SIMPLICITY of investing in stocks and bonds is quite befuddling. Guess so many do not want to be emabarrased how they have failed miserably with their investments . Many docs also think they are smarter than the markets and feel their superior intelligence will beat the odds. HOW SAD!
KEEP PLUGGING HELPING INVESTORS ONE AT A TIME!
Superior intelligence! It’s the Dunning-Kruger effect writ large. Those with the least knowledge/ability assume the most competence whereas the true experts assume they are less competent than they are!
It’s my favorite cognitive bias. See it everyday on the floors…..
https://en.m.wikipedia.org/wiki/Dunning–Kruger_effect
Cool.
Thanks for the reference, Kpeds.
I hadn’t heard of that one!
Excellent post whitecoat! For most investors this post is all they need to read. There is something to be said for the KISS principle. In a investing world filled with complexity it is so easy to get sucked up in that world. Especially when the outliers are the simple ones.
What, you mean the $100,000 I just spent on Beanie Babies is a wasted investment? I’m SHOCKED by this allegation, simply shocked!
But seriously, if anyone is as fascinated by speculative bubbles and the human factors that drive them as I am, the book The Great Beanie Baby Bubble is worth a read. If you are inclined towards speculation, it also might tame that impulse, at least for a while.
This list is stellar! People forget that investing is easy if you focus on what’s important. I especially like the rule about not letting the tax tail wag the investment dog. Hobbyists, like myself, lose track of this!
This is like that little handbook of “insert medical specialty” that you could get through all of training and most of a career using. You’ll never be “advanced” but do you really need that?
I have an issue with rebalancing. You say:
“But never rebalancing is a rookie mistake. Investing 101 teaches that you should rebalance your portfolio every now and then.” You don’t clarify if balancing should be done by selling or with new contributions. Maybe that was beyond the scope of this review style post.
I only rebalance with new contributions because rebalancing between or within qualified accounts is a headache and rebalancing with a taxable account might realize gains. So does one need to rebalance without using only new contributions?
The problem with my plan however is that as our nest egg has grown and I’ve cut back on work, the new contributions don’t really move the asset allocation enough to rebalance so at some point I’ll have to sell to rebalance. However, in the early-mid accumulation phase of most doc income my problem shouldn’t exist.
The first half of your career its pretty easy to do it with just new contributions. After that, you may find you have to sell occasionally. Try to do it in a tax-protected account.
WCI
I have a very specific question, was hoping to get your input as I am getting confused based on the recommendations I am getting so far.
I am switching from baird financial to Etrade, I am moving both my roth and solo 401 K to E trade. I work as a 1099 physician. No other employees in my business. I have a third party administrator for my 401 K. I am firing my financial advisor and managing my own investments via index funds. E trade recommended I fill out a non-custodial retirement plan application.
In that application it gives me two options, 1) pooled account 2) participant directed account. I have already read
https://www.whitecoatinvestor.com/the-best-401k-plan-pooled-or-participant-directed/
I am not sure what’s the best option for me.
I don’t recall a benefit for a pooled account for a solo 401(k). I’d just do participant directed but it probably doesn’t matter much.
Words to live by, or at least invest by.
Dr. Cory S. Fawcett
Prescription for Financial Success
Nice post. It amazes me the number of people out there who violate these rules. However, when it comes to medicine they make sane rational decisions.
Just one minor quibble. As gambling goes, ALL casino games have a negative expected return (or the casino’s wouldn’t be in business) However, I would say that roulette if played at a low stakes table is pretty low risk. Now something like no limit texas hold’em where you can go “all in” and lose your whole bankroll is another matter…
I would disagree. Poker is the only game in the casino that long term you actually have any chance of making a profit. You aren’t playing against the casino when you play poker, you are paying them a fee to play in the casino. Sometimes it can be difficult to outmatch the rake if all of the players at the table are decent, but on a given Fri/Sat night at almost any casino, there are easy 5/10 nl tables that an average player should be able to profit from.
All players over time will get the same cards and the same good and bad beats, but the skill level of that player is what will determine your long term win percentage.
The hard part is recognizing when you are not a good poker player and should treat it as if you were playing blackjack and just play to have a fun time. The other challenging part for new players is bankroll management and increasing limits too quickly which can wipe away months of earnings.
This is a great post. I am a relatively new investor essentially using a couple low cost index funds, and while I am aware of much of this (lots that was learned from reading WCI), this is a nice refresher and place to direct friends to. I do love to gamble (within reason of course 😉 ) and I see the draw of looking for greener pastures and faster earnings, but we preach evidence based practice in medicine, why not apply the same rules to investing/saving?
Great post. I have slipped into being a gradual rebalancer, generally adding to my underweight areas when I have the money rather than selling to rebalance and triggering capital gains. I had pangs of inadequacy at not rebalancing once or twice per year, so especially liked the part doing it about every 1-3 years. My self-esteem thanks you. I am not lazy after all – I am just following best evidence.
Excellent stuff. Good reminder personally and great to have a resource to send colleagues who ask, “How do I invest?”
I don’t know if I’m posting at the correct place, but here goes. I have a Keogh plan at Schwab through my medical group, and I fully fund that every year (contributed $36,500 in 2018). I have a side individual business, and I want to know if I create a new profit-sharing Keogh plan at Fidelity, what is the max amount that I can contribute in 2018, and if that is affected/lowered by the max funding of my Keogh plan at Schwab. Thanks.
I think this is the post you’re looking for:
https://www.whitecoatinvestor.com/multiple-401k-rules/
Instant classic.
I thought it was good enough that it surprised me it took 3 days for someone to say that, especially with only 24 comments. Maybe it wasn’t as good as I thought!
Nice clear review. It reminds me the adive I first received as a new attending. A colleague recommended I read the Coffee House Investor. Keeping it simple and forgetting about Wall Street was the basis of the message. The book fell a little short with execution of the advice. I believe the author then started a firm to manage many of his fans money and ironically gladly charged fees. I admit I still use a firm to manage my money mostly because I don’t fully trust myself and in the event I die, wife will be with someone I trust. This costs me 0.75% which really hurts. I am not sure how others look at this from this perspective. I am close to doing all myself but hesitate for this reason.
Thanks for all the great content!
You could do far worse than hiring Bill Schultheis to manage your money!
I have a question about rebalancing when you’re making investments each month. Since I view all of my accounts (both tax protected and taxable) as one portfolio and we invest about $20K/month, how should I go about investing each month and rebalancing? Should I just divide the $20K among the accounts in the taxable account? If I do that, then the funds that are in the tax protected accounts never really get their fair share. I want to avoid having to pull all of the numbers for all of our accounts (401(k), backdoor ira, taxable) every month before we invest each month. Any suggestions would be greatly appreciated.
It gets pretty messy, I’ll admit and nothing is every really perfectly in balance. But that’s okay. You just need to be close. I deal with this issue every single month, so I know how you feel. Sometimes I “pull all the numbers” but other times I just wing it. This month, I just winged it. I threw the entire monthly amount to invest into the Total Stock Market fund. Last month I threw it all into TISM and International small and nominal bonds. The two months before that was some small value and REITs and TIPS and more TSM.
Investing well takes work, unfortunately, and somebody has to pay at least a little attention to this stuff, whether that is your, your spouse, or someone you hire.
This post is outstanding!!! Read it multiple times this week. Can never be reminded of these things enough.
Always good to have a refresher course. I keep my Ob-Gyn rotation textbooks for this (and nostalgia, honestly). I have primarily index funds but I’m curious as to whether you think that the increase in valuations (and all the talk around the Schiller CAPE) is related to the fact that there are fewer public companies being traded than in the past many many years?
Since those of us without 8+ figure incomes (can’t use 7+ since I want to include you!) don’t have a lot of private equity investment options available, we “have” to buy investments (stocks in this case) on exchanges to obtain diversification and therefore necessarily have to take a higher PE ratio.
Regarding “Don’t Catch a Falling Knife”:
Yes, I would not catch a falling knife if I do not see it reached my value point. Once it reached my value point, I will scoop it up even it falls further down. A good company will be worth the price I pay. I would pose my argument the other way around like this:
You may like to buy a nice property with a great tenant that has a net operating income of $8,000 per year if the price dropped from $300K to $100K.
Of course, given the option, I’d rather buy it for $50K than $100K. 🙂 Darn crystal ball always so cloudy. And the truth is that properties/stocks don’t generally fall that far in isolation- the price drops that much because something happens that is highly likely to affect the future income stream from it.
Thanks for this lovely post. I completely agree with you that the Higher Risk is a Necessary But Not Sufficient Condition For Higher Returns.
Thanks for the helpful reminder. This is a great article to point someone to in the beginning.
I can’t count t the number of times I’ve started having a basic conversation about a colleagues 403B or 457 and watched their eyes glaze over. I always forget that there are still a ton of people out there who literally choose (some intentionally) to know nothing about investing and personal finance.
There’s one point I thought you’d include on this thread: “Live beneath your means.” I realize you cover this extensively elsewhere on your site, but given this thread is a 101-level course, I figured this simple nugget would be dogma and thus make the cut.
Love your site – wish I’d stumbled across it 10 years ago!
That reminds me of a talk I gave at my residency program once. At the end one of the attendings told me I should have told the residents not to run up all their credit cards. I thought “I needed to say that?”
Haha, great point! Thanks so much for putting so much time and effort into this website. I can’t tell you how much I’ve learned, and I appreciate it so very much.
I love the advice to cut back on risk when you hit your goals. I think taking money off the table is something we can all be bad at, but having goals to aim at is not just a way to focus us on a worth aim.
It also reminds us that enough is enough.
Helpful article I liked the statement don’t catch a falling knife this statement teaches a lot before investing. Thanks for the helpful article.
Great advice. Like in medicine, in personal finance there are people who simplify things and people who complexify things. I’ve also found that simplifiers have a better understanding of a topic and sought them out. The KISS principle definitely applies to finance!