Yogi Berra on Investing

Two of my hobbies are baseball and investing. So when Vanguard published an investment article based on seven Yogi-isms I was quick to read it. That intrigued me enough to write my own version. If you find it helpful, thank Yogi. 

For readers unfamiliar with Yogi Berra, here's his 1954 baseball card (from my collection). He was a great catcher who played for the New York Yankees during the years of Mickey Mantle and Whitey Ford. Yep, I have their cards, too. 

Yogi remains famous for his baseball skills and priceless quotes. Without trying to be funny, head-shaking Yogi-isms just popped out - and the world continues to laugh at them. They're bigger than baseball! Here we go, investing wisdom from 7 Yogi-isms:

1. "If you don't know where you're going, you might wind up someplace else."

Do you want to put your kids through college, buy a house, start a business, transition to that volunteer career you've had in mind, or retire with enough money for the duration? You probably won't "luck into" any of these. It's better to make a plan and put it somewhere that you'll see 3-4 times a year. In one of those times, sit down long enough to assess whether you need to make adjustments. 

2. "Don't always follow the crowd, because nobody goes there anymore. It's too crowded"

Yogi is right, following the crowd is a poor strategy. By the time most retail investors like us decide to buy, we've missed most of the rise. And by the time we decide to sell, it's too late.

Instead, determine an asset allocation strategy that fits your risk tolerance and implement it primarily with low-cost index funds. Then, check it once or twice a year and, when the stocks rise above your target by 3-4%, rebalance back to your target. Following this strategy is inherently contrarian because it means selling things that have been rising in order to buy things that have been falling. To understand how this results in a winning investment strategy, read through the articles in Asset Allocation Basics.

3. "It's tough to make predictions, especially about the future."

This quote from Yogi and is similar to the previous one. Looks like Yogi thinks this concept is important enough to repeat. I completely agree. 

The jury came in a long time ago - trying to time the market is a losing strategy. You can inhale all the investing news you want, just don't base your investments on that news. 

4. "You better cut the pizza in four pieces because I'm not hungry enough to eat six."

Cutting a pizza into just 4 slices translates nicely to investing because there are four primary asset classes that we need in a diversified portfolio: domestic stocks, domestic bonds, international stocks, and international bonds. Each of the four asset classes includes many ingredients, just like a slice of pizza. Here's how it works in investing:

Minimize the number of investment decisions.

To adequately diversify across the 4 asset classes using individual stocks and bonds requires a portfolio with hundreds of individual line-items. That is pretty much impossible for virtually everyone reading this page.

But every reader can implement an excellent portfolio by buying just one index mutual find for each of the above four asset classes. Each of these funds includes enough ingredients to provide instant diversification across that asset class. For instance, Vanguard offers a low-cost index fund for each of the four asset classes (VTSAX, VBLTX, VTIAX, VTABX). Many other investment companies offer similar funds for the first three asset classes, but maybe not yet for international bonds. As the markets shift around and the time comes to rebalance back to your desired asset allocation, it's easy to rebalance among these four funds - especially if they're all in the same investment company.

Today, you don't even need to juggle four mutual funds. You'll do just fine buying a single mutual fund that automatically rebalances back to your desired allocation. For example, choose the one of the four Vanguard LifeStrategy Funds that is the closest fit to your desired asset allocation and you're done. Or splice two of them together, if you want to fine-tune your portfolio to a more precise asset allocation. 

Another good option is to invest in a target-date fund, which is especially good for those with 20 or more years before retirement. 

Hobbyists may make a slightly higher return, but these four-fund and single-fund solutions will still beat what you can get from a professionally managed account, after taxes and fees/expenses. I'm a hobbyist investor and my portfolio has about 15 funds in it to cover the four asset classes. Every year I compare whether my hobby has made or lost money compared to what I would have had with just the LifeStrategy fund that matches my risk tolerance. Generally, I make an extra 0.5 - 1.5%, but I must admit that there's no way to ensure that I'm not increasing my risk by fine-tuning. And, I'm getting older and may not want (or be able) to manage this complexity in a few years. So I'm slowly transitioning to a Vanguard LifeStrategy fund that can run itself for the duration. 

Minimize the number of investment institutions you use. Of course, this only applies if you are juggling multiple accounts (such as retirement accounts and taxable accounts) and are implementing your asset allocation with multiple funds or individual investments.

Here are three reasons:

• It's easier to rebalance to your asset allocation.

• It's easier to measure how your investment strategy is doing compared to a benchmark (your investment company's website is sure to provide a great tool, but it can only compute IRR (internal rate of return) for the securities it is holding for you).   

• It's easier to minimize the overlap of individual stocks in your fund mix.

It would be great to buy all your investments from one investment company, but this is usually impossible. For example, your employer may use Fidelity for your 401k/403b tax-advantaged account and you may have your taxable investment account at Schwab. Still, minimize as much as you can. 

5. "A nickel ain't worth a dime anymore."

The visible and hidden costs in an actively managed portfolio are much higher than in a portfolio built primarily with index funds. The reasons, 1) active trading requires a lot of research - and research costs money. 2) marketing costs are much higher because they have to convince you that their research is worth something. For more about this, see Portfolio Leaks.

6. "I'd find the fellow who lost it, and if he was poor, I'd return it."

This was Yogi's response to someone asking what he'd do if he found a million dollars.

One of the easiest ways to lose money is by investing without understanding how your returns are taxed. So learn all you can about minimizing taxes. 

Long-term vs. short-term tax rates: Stock index funds have a low turnover rate, meaning they hold individual investments longer than 12 months, meaning your returns are taxed at a low long-term gains rate. Actively managed funds have a much higher turnover, so much so that their returns are taxed at the much higher earned income rate.

The difference in these tax rates varies with income levels, but the typical reader of this page is in a marginal tax rate which taxes long-term capital gains about 12% lower than their earned income tax rate. So if you receive $100 return from an index fund you'll keep $12 more of it than if you received that same $100 return from an actively traded fund.  For more on this, see Mutual Fund Distributions & Taxation. 

Asset location: Put as many dividend-producing investments as will fit in your retirement account where they won't incur any taxation on the returns. And put those investments that are likely to return long-term capital gains into a taxable account where, when you sell them (to rebalance or to use for expenses), you will pay tax at the low long-term gain rate. 

Donate from your RMD: If you are over 70.5 years old and donate to charities, it is much smarter to donate money from your annual Required Mandatory Distribution to charity than from any other source. The donation counts against your RMD but you don't report it as income (federal or most states)! Since it doesn't show up as income, you don't pay any tax on it. To donate $1000 from any other source means you had to pay tax on that $1000 at whatever your marginal tax rate is. For most readers, this is something like 30% (federal and state). So donating from your taxable money means that $1000 donation actually cost you $1300. So donate from your RMD and eliminate that $300 tax bill, or you can increase your donation to $1300! See Tax-smart Donations.

7. "We make too many wrong mistakes."

Yogi's right again. Here's how to avoid those "wrong mistakes": learn from others who are better investors than yourself. Select those people carefully. Make sure many of them are not also trying to sell you something. Here are resources that I trust: 

• Read widely from Resources/Links - especially William Bernstein, Jonathan Clements, and Daniel Solin.

• Check out Retirement - especially read the Retirement Funding subpage. Also, check out the "25 Times Rule" at Financial Rules-of-Thumb.

• Talk with someone more knowledgeable about personal finances than yourself. If you don't know anyone, look for an acquaintance who seems to know how to manage their financial affairs and ask them for their resources. For instance, talk with the person in charge of finances at your church or your HOA and see where they go for financial advice. If they can't point you to any resources beyond themselves, move on to another acquaintance who can. 

• Check out Vanguard's Personal Advisor Services or a similar service from another investment firm.

• For advice beyond investing, such as advice on annuities, wills/trusts, long-term-care insurance, naming beneficiaries, and such things, look for a Certified Financial Advisor. Consider both commission-based and fee-based CFA's. Also, check out a CFA who is a member of Kingdom Advisors (a professional network of CFA's who self-identify as Christian. You don't have to be a Christian or religious person to engage with a Kingdom Advisor. I am not a CFA or a member of KA but I meet with a KA study group once a month where discuss a KA teaching that encourages ethical and honorable ways to help people with financial matters.  I do this primarily to keep up with what's going on in their industry, and to identify CFA's that I'm willing to recommend to others.

For more Yogi-isms, just google "Yogi Berra quotes." This photo is the backside of Yogi's card (click to enlarge).

Now that you have read my investment interpretation of these Yogi-isms, it's time to read Vanguard's Major league tips to avoid financial errors. 

All the best, Tim