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      2. Buy right and hold tight.

      The most critical decision you face is getting the proper allocation of assets in your investment portfolio - stocks for growth of capital and growth of income, bonds for conservation of capital and current income. Once you get your balance right, then just hold tight, no matter how high a greedy stock market flies, nor how low a frightened market plunges. Change the allocation only as your investment profile changes. Begin by considering a 50/50 stock/bond balance, then raise the stock allocation if:

      1. You have many years remaining to accumulate wealth.

      2. The amount of capital you have at stake is modest (i.e. your first investment in a corporate savings plan).

      3. You have little need for current income.

      4. You have the courage to ride out the booms and busts with reasonable equanimity.

      As these factors are reversed, reduce the 50 per cent stock allocation accordingly.

      3. Time is your friend, impulse your enemy.

      Think long term, and don’t allow transitory changes in stock prices to alter your investment program. There is a lot of noise in the daily volatility of the stock market, which too often is ‘a tale told by an idiot, full of sound and fury, signifying nothing’.

      Stocks may remain overvalued, or undervalued, for years. Realize that one of the greatest sins of investing is to be captured by the siren song of the market, luring you into buying stocks when they are soaring and selling when they are plunging. Impulse is your enemy. Why? Because market timing is impossible. Even if you turn out to be right when you sold stocks just before a decline (a rare occurrence!), where on earth would you ever get the insight that tells you the right time to get back in? One correct decision is tough enough. Two correct decisions are nigh on impossible.

      Time is your friend. If, over the next 25 years, stocks produce a 10% return and a savings account produces a 5% return, $10,000 would grow to $108,000 in stocks vs. $34,000 in savings. (After 3% inflation, $54,000 vs. $16,000). Give yourself all the time you can.

      4. Realistic expectations: the bagel and the doughnut.

      These two different kinds of baked goods symbolize the two distinctively different elements of stock market returns. It is hardly farfetched to consider that investment return - dividend yields and earnings growth - is the bagel of the stock market, for the investment return on stocks reflects their underlying character: nutritious, crusty and hard-boiled.

      By the same token, speculative return - wrought by any change in the price that investors are willing to pay for each dollar of earnings - is the spongy doughnut of the market, reflecting changing public opinion about stock valuations, from the soft sweetness of optimism to the acid sourness of pessimism.

      The substantive bagel-like economics of investing are almost inevitably productive, but the flaky, doughnut-like emotions of investors are anything but steady - sometimes productive, sometimes counterproductive.

      In the long run, it is investment return that rules the day. In the past 40 years, the speculative return on stocks has been zero, with the annual investment return of 11.2% precisely equal to the stock market’s total return of 11.2% per year. But in the first 20 of those years, investors were sour on the economy’s prospects, and a tumbling price-earnings ratio provided a speculative return of minus 4.6% per year, reducing the nutritious annual investment return of 12.1% to a market return of just 7.5%. From 1981 to 2001, however, the outlook sweetened, and a soaring P/E ratio produced a sugary 5% speculative boost to the investment return of 10.3%.

      Result: The market return leaped to 15.3% - double the return of the prior two decades.

      The lesson: Enjoy the bagel’s healthy nutrients, and don’t count on the doughnut’s sweetness to enhance them.

      Conclusion: Realistic expectations for the coming decade suggest returns well below those we have enjoyed over the past two decades.

      5. Why look for the needle in the haystack? Buy the haystack!

      Experience confirms that buying the right stocks, betting on the right investment style, and picking the right money manager - in each case, in advance - is like looking for a needle in a haystack.

      When we do so, we rely largely on past performance, ignoring the fact that what worked yesterday seldom works tomorrow. Investing in equities entails four risks: stock risk, style risk, manager risk, and market risk. The first three of these risks can easily be eliminated, simply by owning the entire stock market - owning the haystack, as it were - and holding it forever.

      Yes, stock market risk remains, and it is quite large enough, thank you. So why pile those other three risks on top of it? If you’re not certain you’re right (and who can be?), diversify.

      Owning the entire stock market is the ultimate diversifier. If you can’t find the needle, buy the haystack.

      6. Minimize the croupier’s take.

      The resemblance of the stock market to the casino is not far-fetched. Yes, the stock market is a positive-sum game and the gambling casino is a zero-sum game . . . but only before the costs of playing each game are deducted. After the heavy costs of financial intermediaries (commissions, management fees, taxes, etc.) are deducted, beating the stock market is inevitably a loser’s game. Just as, after the croupiers’ wide rake descends, beating the casino is inevitably a loser’s game. All investors as a group must earn the market’s return before costs, and lose to the market after costs, and by the exact amount of those costs.

      Your greatest chance of earning the market’s return, therefore, is to reduce the croupiers’ take to the bare-bones minimum. When you read about stock market returns, realize that the financial markets are not for sale, except at a high price. The difference is crucial. If the market’s return is 10% before costs, and intermediation costs are approximately 2%, then investors earn 8%. Compounded over 50 years, 8% takes $10,000 to $469,000. But at 10%, the final value leaps to $1,170,000—nearly three times as much . . . just by eliminating the croupier’s take.

      7. Beware of fighting the last war.

      Too many investors - individuals and institutions alike - are constantly making investment decisions based on the lessons of the recent, or even the extended, past. They seek technology stocks after they have emerged victorious from the last war; they worry about inflation after it becomes the accepted bogeyman, they buy bonds after the stock market has plunged.

      You should not ignore the past, but neither should you assume that a particular cyclical trend will last forever. None does. Just because some investors insist on ‘fighting the last war,’ you don’t need to do so yourself. It doesn’t work for very long.

      8. Sir Isaac Newton’s revenge on Wall Street - reversion to the mean.

      Through all history, investments have been subject to a sort of Law of Gravity: What goes up must go down, and, oddly enough, what goes down must go up. Not always of course (companies that die rarely live again), and not necessarily in the absolute sense, but relative to the overall market norm.

      For example, stock market returns that substantially exceed the investment returns generated by earnings and dividends during one period tend to revert and fall well short of that norm during the next period. Like a pendulum, stock prices swing far above their underlying values, only to swing back to fair value and then far below it.

      Another example: From the start of 1997 through March 2000, NASDAQ stocks (+230%) soared past NYSE-listed stocks (+20%), only to come to a screeching halt. During the subsequent year, NASDAQ stocks lost 67% of their value, while NYSE stocks lost just 7%, reverting to the original market value relationship (about one to five) between the so-called ‘New Economy’

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