The Business of Investing

Jack Bogle is frequently quoted. Jack was the founder and chief executive of The Vanguard Group and is credited with popularizing the index fund.

Here’s one of my favorite Bogle quotes:

“The stock market is a giant distraction from the business of investing”.

Warren Buffett is also often quoted.  Because Mr. Buffett purchased individual stocks, it was possible to observe how he approached investing as a business.  For example, Buffett eschewed tech stocks, yet had a large stake in Apple.

I’ve taken this whole “business” approach to heart, and I do think it is helpful for all investors, even those who prefer index and bond funds.

If approached as a business, it is implied that investing should not be emotional or  automatic.  That is not to say that we need to purchase individual stocks.  One of my favorite graphic examples is the “Callan Periodic Table of Investment Returns.”  I have copies going back to 1987 which is about when I began investing seriously.   The table shows the annual returns for key indices, from bonds to emerging markets to large cap stocks.  How these indices perform year by year is a helpful indicator of why diversification is important.

I came late to the party at age 41.  Prior to that, while I was aware of investing, I was pre-occupied by building a life, including a business and saving.  My approach to “investing” included a share of a commercial building, from which to run my business.  While I have owned several homes, I never considered these to be investments.  To the contrary, these were expensive options which required maintenance. I decided to purchase less home than I could afford, make improvements over time and bank the rest.   I always purchased with the intent to own at least 10 years.  Most recent condo was sold after 22 years.  When I sold, the properties were in better condition than when I purchased.

Continuous education over a working span of 55 years was time consuming and expensive.  But it was an investment in my most valuable resource.

One can do well, long-term (10+ years, although 20 is better) with indexes. Those “lost decades” do occur from time to time.  I do think one has to be aware of personal risk tolerances and the range of products available.

For example, bond funds are popular approach to diversification, and the 60/40 portfolio was long a popular allocation.  Yet, when interest rates were held extremely low savers suffered.  One of my spouse’s retirements  accounts  is comprised entirely of Vanguard Target Date Funds.  It took a significant double-digit hit in 2022 when bond funds dropped.  The account has since recovered.  She began investing in these funds in 2004. The funds show a 10-year return of 7.88%.

I took a different approach and in 2021 I exited bond ETFs as I felt that investors were not being rewarded for the bond fund risk they were taking.  I cautioned others.  Then the bond route occurred. I had kept a very small quantity of bond funds. Today my TIPS fund continues to show a loss, 12.5%.

When I began I dabbled.   As I became more educated I began building a “hybrid” portfolio.  It contained individual stocks and specialized stock funds/ETFs.  I preferred not to own certain things in the indexes.  These include gambling, tobacco, alcohol, health insurance companies, companies that profit from Medicare, and certain tech stocks the products of which I have the opinion should have carried the label “Made in China by slaves”, etc.

In 2006 I cautioned about bank stocks, which were a significant component of certain indexes. I altered my approach, screened for bank stocks and sold certain mutual funds and ETFs.  I built a portfolio of selected stocks and certain stock funds.

Now, I admit my approach wasn’t the easiest.  Nor was starting and running a high-tech process control business through multiple recessions and government whiplashes.

My portfolio may not behave like one comprised entirely of index ETFs, and the expense ratio is slightly higher.  To compensate for uncertainty I decided to save more to meet my goals. After saving, I decided specifically where and how to invest.  That, by the way is the challenge young people face; If you can’t or don’t save, then you have nothing to invest for a future.

At one time I had a portfolio which was 100% stocks.  As I approached full retirement I shifted to 80/20, then 70/30 and arrived at about 55/45. I’ve been taking RMDs since 2018, but the performance of my investments has more than replenished what was taken.  I haven’t added any cash aside from dividends and interest, but since beginning the taking of RMDs my portfolio has increased in value 30%.

Aside from taking cash or reinvesting dividends I have made few changes since 2021.  I did purchase a stock in 2024.  It is 1.6% of my portfolio.

To maintain awareness of what I own, and the underlying stocks I use the Morningstar X-ray tool.  My largest stock holding is 3.81%. It is nearly impossible to avoid certain companies.  Apple, for example is 0.24% of my stock holdings. United Health  Group is 0.13%, etc.

Using an approach different from index investing makes it more difficult to predict the outcome.  That, in turn means that a specific savings rate may not create the desired portfolio value. When I constructed my initial portfolio, I did a lot of research and concluded that the value of the portfolio would be determined not only by skill, but also by the market and simple luck.  A severe bear market 25 years hence could severely reduce the value of the portfolio at retirement.  I concluded that the range of outcomes could be quite broad.  For example, $500,000 to $1,500,000.  I did investigate annuities, too.

I’ve been lucky.  My portfolio value after 38 years is at the high end of the projections,  even after seven years of RMD withdrawals.

Having removed nearly all of the emotions from investing, I’ve become rather detached.  There is no euphoria, nor are there white-knuckle experiences.  This has been replaced by a calm certainty of outcome.