Staying in the Game

I choose the path that lets me remain in the game and compound for a long time over the path that might make me rich the fastest.

A high return alone cannot make me wealthy. I must be able to sustain it for a long time. Compounding stops if one bad judgment destroys my capital or forces me to sell during a downturn.

The first objective of investing is therefore not the highest possible return. It is preserving the ability to keep investing.

I do not believe I can predict the market. I cannot know when the next crash will come or which industry will dominate several years from now. Instead of trying to guess the unknowable, I entrust my capital to American productivity and innovation and to the long-term growth of its companies.

The belief that the United States will remain the strongest market is not a truth. I therefore keep some capital in markets outside the United States. This cannot hedge away American risk entirely, but it can modestly reduce my concentration in one country.

I divide my investment assets into four parts.

• 70% in U.S. index funds — the core of wealth accumulation
• 10% in international index funds — capital that modestly reduces my concentration in the United States
• 10% in cash and short-term Treasuries — capital that helps me maintain the plan through a downturn
• 10% in individual investments — capital used to test my own judgment

I entrust 80% to the market, use 10% to test myself, and spend 10% to buy the right to wait.

This structure does not prevent losses. Index funds and individual investments together place 90% of the portfolio in risky assets. If the market and my individual holdings fall together, the value of my investment assets could temporarily decline by nearly half.

I accept that possibility before investing. Risk is not an accident that may suddenly appear in the future. It is a price I agree in advance to bear in exchange for long-term returns.

I do not try to remove this risk through predictions or options. I believe the risk of leaving the market while trying to avoid a decline is greater. Instead, I design both my life and my portfolio so that I will not have to sell when a decline comes.

I keep one year of living expenses outside the investment portfolio. Money I expect to use within three years does not go into stocks. I do not use leverage. When the market falls, I do not sell, and as long as my income continues, I keep buying.

The separate living reserve prevents forced sales. Cash and short-term Treasuries inside the portfolio give me room to buy underweight assets in a downturn and maintain the plan I set in advance.

I review the allocation once a year. New contributions go first to assets below their targets. I do not change the plan in reaction to the market; I restore the plan after the market has pulled it out of alignment.

Individual investing is not the core strategy but a bounded experiment. I enjoy studying the technology industry and understanding how companies are structured. When that work leads me to a judgment different from the market’s, I can risk a small amount of capital to see whether that judgment is actually useful.

Strong conviction does not justify a large position. People can be confident while knowing little, and those who understand deeply can still be wrong. I therefore target 10% for individual investments and set an absolute ceiling of 15%. If the allocation exceeds 15%, I move the excess into index funds. I do not convert safe assets into individual investments.

No single company receives more than 3% of my total investment assets. I invest only in industries I understand. Before buying, I record the investment thesis and the conditions under which I will admit that it was wrong. I do not use leverage, options, or short selling.

Nor do I increase the allocation after a few successful decisions. Individual investing remains an experiment until I have evidence that it has beaten the index over a sufficiently long period. If my insight is real, the evidence will accumulate. If it is not, I will learn at a limited cost.

An investment principle does more than decide what to buy. It sets the boundaries of my behavior in advance so that greed and fear cannot destroy a long-term plan.

I cannot control the market. I cannot control my returns. I can control only the allocation of my assets, the amount of risk I accept, and my behavior during a downturn.

Getting rich quickly requires luck. There is no certain way to become wealthy. But if I survive long enough for compounding to work and never let one judgment remove me from the game, I can improve the odds.

I do not try to eliminate risk. I define in advance the risk I can bear, then design the portfolio so that risk cannot force me out of the game.