Your New Financial Adviser: Radiohead
Over the decades, the music of Led Zeppelin, Judas Priest, even the Beatles has been rumored to hold hidden Satanic messages. Not a lot of useful advice on ETF investing, though. For that, you need to turn to the songs of Radiohead.
Everything In Its Right Place
This, the perfect song to open a Radiohead album, hints at the importance of asset allocation. Successful long-term investing is largely about creating the ideal portfolio mix of stocks, bonds and other assets. Exchange-traded funds offer quick and easy asset allocation using everything from stocks and bonds to commodities and real estate. To see what that mix might look like, check out “The Cheapest ETF Portfolio” on etf.com. It comes up with sample asset allocations for investors, using the cheapest ETFs in each asset class. The overall fee for the portfolio is less than 0.10 percent of assets annually.
Some ETFs protect portfolios from dangerous collisions. This includes the iShares 20+ Year Treasury Bond ETF (TLT) and SPDR Gold Trust (GLD). Such ETFs are known as safe havens and are easy to ignore when times are good. When things go south or there's a shocking geopolitical event, they demonstrate their worth by helping damp portfolio volatility. In 2008, GLD was up 3 percent and TLT 33 percent, while the S&P 500 was down 36 percent.
I Might Be Wrong
What a great way to stress that not every investment idea you have is going to pan out and that you'll be better off if you swallow your pride and cut your losses. Not to mention the guitar riff. Your speculation that the Market Vectors Russia Small Cap ETF (RSXJ) was going to the moon didn’t pan out and now it’s getting ugly? Admit you were wrong. You can use a simple technical indicator to help arrive at a decision to cut your losses, such as if the ETF's price moves below its 200-day moving average. Or you can use a stop-loss order to trigger a sale of some or all of your position if the price falls below a certain level.
This song title is from “1984,” George Orwell’s novel about government brainwashing and other totalitarian horrors. Then there's the band's winking reference to the power of money compounding over time. When you invest over long stretches, particularly in retirement savings accounts, 2 + 2 really can equal 5. For example, if you had bought $2,000 of the SPDR S&P 500 Trust (SPY) 20 years ago, with dividends reinvested it would be worth about $10,000 today.
Where I End and You Begin
A haunting song, in addition to a clear warning to individual investors about leverage, inverse and VIX products and, even worse, leveraged VIX products. If you don't know what these are, good. Leave them to the professionals, who find them useful for jumping in and out of the market to hedge or speculate. (If you really must learn about them, go here.) Even though it may seem tempting one day to buy the Direxion Daily Junior Gold Miners Index Bull 3x Shares (JNUG), resist. Not only is an ETF like that about 10 times as volatile as the S&P 500, but for buy-and-hold investors, the daily rebalancing of these ETFs will most likely kill your returns over the long term, even if you get the overall bet right. See? They're painful to think about, let alone own.
Keep upbeat and don’t let doomsday scenarios and perma-bears make you think the world is going to hell and you should put your money in gold. Even factoring in the brutal financial crisis of 2008, the iShares Russell 2000 (IWM), a popular but volatile small-cap ETF, still has a 10-year return of 127 percent, after it was down 34 percent in 2008. Stay invested and stay hopeful. That said, it's always good to regularly rebalance your portfolio so your asset allocation isn't out of whack, which may mean taking some profits after a long rally.
Fake Plastic Trees
One of the prettiest Radiohead songs reminds us not to fall for every new trendy ETF. Just because you can buy the Guggenheim China Real Estate ETF (TAO) or the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID), that doesn’t mean you should. Some of the most popular ETFs are boring, cheap and effective. They include the Vanguard Total Stock Market ETF (VTI), the iShares Core Total U.S. Bond Market ETF (AGG) and the Vanguard Total International Stock Market ETF (VXUS). Those three ETFs alone cover tons of ground and are very cheap. That’s why they have a combined $60 billion in assets. When it comes to ETF investing -- pretty much all investing, actually -- boring and old-fashioned can be a good thing.
Anyone Can Play Guitar
An early Radiohead song that admits it isn't that hard to learn to invest using ETFs, in coded language about the simplicity of certain guitar chords. Just don't get carried away and start trading them a lot (the ETFs). Check out this post from last year about the best ETF resources via books, websites, podcasts and videos, to learn the basics.
Little by Little
This underrated song from Radiohead’s last studio album is a great mantra regarding patience. Becoming a good investor, and earning the returns that flow from that improvement, will take years, not months. Investing can be fun, but can also lead to short-term thinking and, worse, short-term trading. The way to beat the house and hook yourself up for retirement is to slow down and appreciate the smaller gains that accumulate over many years and add up to more than you think. Think base hits, not home runs.
How I Made My Millions
A totally rare B-side song that only Radiohead buffs (OK, like me, there you go) will ever have heard of -- but, I hope, one that will apply to you after all is said and done.
There you have it. An eclectic, 20-year career, eight studio albums and a ton of non-Satanic ETF advice. And how did Thom Yorke and his crew acquire such unlikely expertise? It's a mystery. Their longtime manager, Chris Hufford, says band members aren't giving interviews.