Happy day to you. This is Ken Kaufman and I am thrilled you’re here for Episode number 71, “The Winning Move.” Now, the winning move, this came up because a few weeks ago, my family decided to watch an old movie that came out, I think it was the early 1980s, called “WarGames”. And this is all on the heels of the Cold War that happened between the United States and Russia. And then, there was this nuclear arms race to see who could get themselves armed up and point their missiles at the other country first. And the premise of this movie or this story was that there’s a young man in high school, very brilliant with computers, and he somehow inadvertently logged into and accessed a computer system that had just been given control over basically pushing the launch button on all of the United States’ nuclear weapons. And the premise of the story is that the computer was very smart and that it could learn. And it would run scenario after scenario after scenario. And it would be smarter than any single human could be to figure out the absolute best moves to make to create the best possible outcome for the United States in any type of scenario.
And as this young man had hacked in and thought he was just playing a game for fun, he didn’t know that he was actually inside of the U.S. government system. Of course, this is all just a nice fun story with a nice exciting plot and storyline to go with it. But he hacks into this and he’s playing a game. But to many military officials, it looks to them that Russia is actually launching nuclear weapons and they’re about to launch weapons back. And the computer just kind of starts to take over and then it starts playing this game over and over and over again. And it ultimately teaches itself and stops itself from actually launching the real missiles, because it plays out so many scenarios and realizes no matter what scenario you start with, if Russia launches first, if the United States launches first, if China launches first, if anybody launches first, it just doesn’t matter, the outcome creates a loss for everybody because everybody just ends up launching all their missiles, and it creates this complete obliteration of life as we know it on the Earth, in these computer scenarios. And so again, I don’t mean to be dramatic or anything, this is just the storyline and the plotline, and the computer’s playing through these scenarios. And finally, it teaches itself that the winning move is to not play. The only way to win the game and allow civilization to continue as we know it is to not launch the missiles, because no matter what scenario you launch them under, everybody else launches and it wipes out and destroys the world.
Now, what in the world does that have to do with building net worth? Here is the application, as I watched the movie and thought about this primary principle that the movie was trying to teach. When it comes to deciding your financial plan and your investment strategy, there are winning moves and there are losing moves. In my mind, the winning move is to not play, not the game, but to try to play the stock market. The winning move is to buy the stock market. Don’t focus on any one stock or bond. Don’t focus on any one asset class or another, but rather diversify, buy, and hold. This could mean that you just buy the Vanguard Total Stock Market Fund and that’s an index fund, very low expenses. And it owns a piece of basically any and every public company in the United States. There are similar funds that do that internationally. There are similar funds that do that for bonds, both domestically and internationally. Or you could go with the strategy a little bit more complex like mine, which is…and I follow several different popular opinions on this, and strategies, and have basically built my own on the backs of the work of a lot of others who have published their work. And it’s basically to try to weight myself in terms of buying indexes, but exposing myself to all of the best asset classes which would include large-cap value, large-cap growth, small-cap value, small-cap growth, real estate and international, and then obviously, the appropriate bonds depending on how much risk tolerance you have, and how much fixed income you want, as opposed to equity from an asset allocation perspective.
So, to me, the winning move is to not try to buy one stock and beat the market. The winning move is to not think that you can outsmart or even guess what’s going to happen. I still remember, everybody said, “Market’s gonna go down because of COVID.” And guess what? All it’s done is gone up. And it’s actually been a pretty strong market. Now, I’m not here trying to proclaim or protest or even lay claim to the fact that I think it’s gonna go up or down tomorrow, I don’t know. And the reality is, nobody else does. I don’t know what’s gonna happen next quarter or not. I don’t know, based on presidential elections, based on global pandemics, based on economic crises, I am not even gonna try to predict. I’ve tried to do that before in the past, and I’m usually wrong, or usually at least 50% of the time I’m wrong.
And so, to me, the winning game is to not try to play the market and guess and try to determine which stock is gonna beat the other stock. Really, because we know, one stock out of every 25 is what actually generates all the gain in any index or the market overall, when you go back and look at it historically. So, the winning game is to not play the stock market, but rather invest in index funds, get yourself broadly exposed to the market, and accept the market returns. If the stock market returns 10% this year, then accept that return and don’t have…tried to shoot for 11% or 12% and lost. Or if the market goes down 20% this year, don’t be upset. If you’d tried to pick individual stocks, you might have even done worse. Buy the market, accept the market return. And when you look historically…
Now, nobody knows the future and I’m not claiming to predict the future. The past tells us that, over time, the stock market keeps growing. Certainly, it has downtimes. And it has stalled out times. It has times of high inflation. It has times of high unemployment, low inflation, low unemployment, everything that you can imagine. And yet, over time, it’s trended up into the right. No promises or no guarantees. We certainly don’t know what’s gonna happen in the future. But while there are a lot of doomsayers and the market zigged when everybody was saying it was gonna zag, and I’m not saying I was right or wrong, I was just invested. I kept investing, I keep investing. I put money away every month and I don’t change my allocations. I do do a rebalance every year on my wife’s birthday, which is actually coming up very soon. So, it’s about time to do the annual rebalancing of all my portfolios. And that’s it. Accept your market return.
If you want to read up on this, you can read John Bogle’s book called The Bogleheads’… Well, that one was not by him. There’s another one called The Little Book on Common Investing. Now, I can’t remember it exactly right off the top of my head. But it’s a great book by John Bogle and he goes through and lays out this claim for the fact that accept the market returns, plan for the market returns, invest for the market returns, buy and hold, don’t sell, don’t move in and out of different stock positions, other than when you’re doing your quarterly or annual rebalancing, as you need to get your portfolio back aligned, and then, also consider if you need to move your asset allocation more toward fixed income or more toward equity-based on whatever your circumstances and situations are. You can talk to a financial advisor who can help you figure out exactly what that should be for you.
So, in parting, the point that I’m trying to make, the winning game is not to play the stock market. The winning game is to play the passive investing, index investing, buy and hold, hold it for the long term, accept the market returns, and the risk that’s associated with that. And de-risk yourself using fixed income or I should say lower your risk, which basically means lower your volatility by using the fixed income instruments. And that ultimately is how you win the game. It’s to not play the stock market and try to pick all the winners. It’s to pick everything and have a nice asset allocation, cover yourself across all the best asset classes, buy indexing, look for funds with fees of 0.15% or lower or point 0.05% in some cases. And there are even some that have waived their fees altogether. And that will be, in my opinion, the winning game. Many many thanks to you for joining today. This is a wrap for Episode 71. Happy day.
