How to Build Wealth Smarter: 10 Rules Backed by Science

There’s lots of noise and bad information out there. So, when people learn what I do for a living, I am often asked, “What is the real secret to investing?”

Given the chance to talk about things I’m passionate about–electric cars, technology, skiing, and particularly investing–I tend to ramble on excitedly, leaving my listeners a little overwhelmed.

What I think most people are looking for are a few easy to understand, succinct, practical tips they can use to build wealth smarter. So, using a “less is more” framework, I’ve narrowed down my core investment philosophy, knowledge and experience into 10 simple rules for how to invest and build wealth:

Rule #1: Give up Trying to Find Bargain Stocks

I know, it’s fun to look for bargains. But consider this: In 2015, around 99 million trades took place daily, with a dollar volume of around 447 billion. That’s per day, folks. What these numbers tell us is that buyers and sellers are continually setting the market prices for stocks, and we can rely on these prices to be fair.

The chances that you will find a bargain stock–that thousands of professional analysts with powerful resources at their fingertips have simply overlooked–are exceedingly small.

Go for a bike ride instead.

Rule #2: Give up Trying to Find Outperforming Mutual Funds

I can say this with authority given my 4 years of researching mutual funds at Morningstar: Very few mutual funds outperform their passive benchmarks over time. Yes, some may crush their benchmarks in any one particular year. But it’s the long-term that matters, and few funds cross that high hurdle.

Here are the daunting odds: According to data from Dimensional Fund Advisors, over a 15 year time horizon, only 43% of the active equity mutual funds studied were able to survive. Beyond that, only 17% were able to beat their benchmark over that time period. You see a similar story on the active fixed income side: 43% survived, only 7% outperformed.

Here’s a good, short video that highlights how difficult it is for mutual funds to beat their benchmarks (and even survive!).

A better approach: Use mutual funds that aren’t trying to actively pick stocks to beat the market, such as funds from Vanguard and Dimensional Fund Advisors.

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