We love this comparison of the familiar U.S. Department of Agriculture Food Pyramid – and different diet trends – to various approaches to investing over the years.
Like our diets, investing recommendations have evolved. Of particular interest is Meb Faber’s take on what the current investment pyramid should look like, with “Don’t do dumb things” as its base.
He’s right. The typical investor routinely exhibits bad behavior by selling low and buying high, trying to time the market and chasing the latest hot stock. The result is usually underperformance compared to, say, a vanilla mutual fund.
The other layers of the investment pyramid include:
- Diversify globally across stocks, bonds and real assets
- Have a rules-based plan and rebalance accordingly
- Implement with low-cost funds and a low-cost brokerage
- Implement tax-aware investing
- Tilt away from market-cap weighting
Our investment process is generally in line with these recommendations.
Faber also creates a financial planning pyramid with these sensible priorities:
- Fund an emergency account and pay down high-interest debt
- Track expenses, set a budget and save
- Max out retirement and tax-exempt investment accounts
- Buy a home
- Address your investments
Note that investments are at the top of the pyramid, not the bottom. That’s because a financial plan is the way to create a solid foundation for all of your financial and investing decisions.
