Ferri: Set It And Forget It Really Works

New Year’s Day exists for an important reason. It’s the day many investors make a resolution to save more and invest better. But then June rolls around and we find that it hasn’t happened. By summer, there’s less money for savings, and investment skills have not improved.

That’s why a year-round, “set it and forget it” investment strategy using low-cost index funds should be part of your next New Year’s resolve. Automation is the key to a successful savings and investing plan.

By “automation,” I’m saying a strategy needs to happen automatically, before your biased brain has time to get in the way of your best habits. Let me explain by describing the arc of my own investment habits. Putting money aside wasn’t a top priority for me when I finished college and entered the military. When we did accumulate a little, I often blew it on bad investments.

Two years later, I got married, and we started a family soon thereafter. That’s when saving money moved up on my priority list. It wasn’t easy saving money while raising a family on military pay. But then I remembered a secret from an old book I had read in college: The Richest Man in Babylon by George S. Clason.

Pay Yourself First

What makes this timeless classic so special? The book holds the secret to successful saving and investing. I’ve already written an article about it called The Five Laws of Gold, so I won’t spoil it for you by giving it all away here. I will say this book turned my financial life around. Among Clawson’s greatest insights is to always “pay yourself first” by setting aside a measure of savings before you spend it on anything else; that way, you’ll never miss it.

Based on this excellent advice, I opened an account with a reputable no-load mutual fund company and created an automatic monthly draw from our checking account each payday. The fund company deducted $25 from our bank account twice per month and automatically invested it in its large-cap US stock mutual fund. Paying ourselves first solved the problem of not having money to put aside by the end of the month.

The second thing we did was not open statements from the fund company for about three years. I didn’t want to know what the monthly balance was, because my emotions and bad judgment had hurt us in the past and I wasn’t going let it happen this time. As I gained rank and earned more money, our $50 per month contribution grew to $100, and then $200.

Our plan worked. Automated savings and investing gave us more money than my wife and I had ever seen in our lifetimes. When I left the military and earned decent civilian pay, we increased our savings to $500 per month, and then $1,000 per month.

‘Aha’ Moment

In 1996, I had an “Aha” moment, and changed the investment portfolio from actively managed funds to low-cost equity index funds. This helped the account grow even faster. The savings from low-cost index investing added to our portfolio rather than to the coffers of Wall Street.

By 1999, we had all the money we needed to send our three teenage children to good four-year colleges, with a little extra money to spare. My philosophy on money is, when you have it and you need it, don’t lose it. So to ensure the available assets would see all of our kids through their college days, I reallocated the entire portfolio to short-term corporate bonds in late 1999.

If you remember your market history, that’s about when the tech stock bubble burst and the stock market collapsed over the next two years. It was a marketing-timing miracle I never saw coming, but the results meant that we still had all the money we’d set aside for our critical family goal.

Paraphrasing Baseball Hall of Fame pitcher Vernon “Lefty” Gomez, it’s better to be lucky than good. While in this instance, luck happened to play our way, the real lessons from this experience made me a die-hard believer in the importance of having an automated savings plan, a disciplined low-cost portfolio strategy, and a commitment to avoiding market risk once you have accumulated the money you’ll need for an important forthcoming event.

Investment Success

The moral of this story is that automation leads to disciplined savings and to a much better shot at achieving investment success. Get it out of your hands. Let someone else do it, even if it costs you a little money.

Young investors today have many opportunities to automate their investments through employee retirement savings plans. Many employers will match contributions up to a certain amount. That’s like getting free money. Put this money into low-cost index funds and don’t mess with them.

529 plans are great for college savings. These can be automated also. Start small and add more as you earn more.

There’s also professional help. A little advice can go a long way, especially when it comes from someone who is committed to a transparent, fee-only service model.

Yet some people shun the idea of hiring an adviser. I’m often asked, “Why would anyone pay an advisor just to buy index funds?” My answer is this: “It won’t happen otherwise.” Creating a saving and investment plan is easy; execution is hard. If you need help, resolve to get it. Then set it and forget it.

For a full list of relevant disclosures, click here. Rick Ferri, founder of Michigan-based Portfolio Solutions, is a widely recognized index investor and the author of several books on index investing.