5 tips to successfully invest in the stock market : Life Kit Buy low, sell high. Don't pick your own stocks. Invest in index funds. The late investor David Swensen, who managed Yale's multi-billion dollar endowment fund, shared his cardinal rules for investing.

Money tips from one of the greatest investors in history

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Illustration of a person implementing basic investing advice by investing their money by choosing a portfolio of diverse stocks.
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There's an old adage, and it's true: the money you save and invest when you're young will grow and get bigger, like a snowball rolling down the hill. So how do you start investing that money?

The first step, said the late investor and endowment fund manager David Swensen in a 2020 interview with NPR correspondent Chris Arnold, is to "understand the underlying dynamics of the investment world. Then you'll be able to do it yourself."

Swensen, who died in 2021, oversaw investments for Yale's multi-billion dollar endowment, which has the best returns of any university in the world. And he was the author of Unconventional Success: A Fundamental Approach to Personal Investment, a guide on how individual investors can manage their financial assets.

He and Brigitte Madrian, a behavioral economist at Brigham Young University, spoke to NPR about how to create a smart, well-diversified portfolio that can earn you a lot of money later in life.

1. Don't sell stocks when the market tanks

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Woman watching the stock market tank.
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When stocks are in free fall, it's scary. You watch your retirement portfolio drop in value. Try thinking about it like a roller coaster. Those can be scary too, but you only get hurt if you jump off the roller coaster. It's better to hang in there and ride back up when the market recovers.

The problem with selling is that nobody knows when the market will turn around and go roaring back up. So if you sell, your retirement fund can get left in a ruined heap at the bottom after the market recovers.

"When you sell in the midst of a crisis, you can put yourself in a position where your portfolio will never recover," said Swensen.

"Losing money feels really painful," said Madrian. "The rule of thumb is that a loss is twice as bad as an equal-sized gain." People end up feeling like they can make the pain stop by selling stocks — even though that's the wrong move.

The best way to stop that painful feeling is to resist the gut-level impulse and think. Madrian, who studies how our human impulses can cause us to make really bad decisions when it comes to money and investing, said "if you're feeling really emotional about something — really excited, or you're really afraid — that's probably not the best time to make a financial decision."

That's just good life advice.

2. Rebalance your portfolio at least once a year

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A man balancing his financial portfolio.
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If you want to indulge your human impulse to do something in the face of a market crash, Swensen said there is one very good thing to do. It's called rebalancing: "selling what's gone up and buying what's gone down. And it's incredibly powerful."

If you had a well-designed pie chart of investments prior to the market crashing, then you have an opportunity to rebalance. For example, if stocks have fallen in value and treasury bonds have increased in value (after investors rushed to buy them as safer investments), then your pie slice for stocks has gotten smaller in value as a percentage of your portfolio. And your bond slice has gotten bigger.

So to rebalance, you sell some of the treasury bond part of your portfolio and buy more stocks. This is not random. You are sticking to your original investment plan: buying low and selling high in a disciplined way to get your pie chart of investments back in balance. (By "buying stocks" Swensen means buying the entire U.S. stock market through low-cost index funds — more on that below.)

Think of it this way: rebalancing is Investing 101: buy low, sell high. That, Swensen said, is a good way to make money. And you don't even have to rebalance often.

"At least once a year and, certainly, after a big move in the markets, make sure that your portfolio is where you want it to be," said Swensen.

If you're in a retirement savings plan, for example a 401k through your employer, Madrian said some plans have an automatic rebalancing feature that will allow you to rebalance once or twice a year without you having to do anything at all.

3. Don't pick your own stocks

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Handpicking stocks.
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It makes sense to be invested in the stock market because over long periods of time, stocks have had much better returns than bonds or other investments. But that does not mean that it's a good idea to buy individual stocks, like Amazon or Tesla or whatever seems like the hot company of the moment.

Here is the dirty little secret of Wall Street. It's almost impossible, even for professionals, to pick individual companies whose stocks are going to outperform the overall market. Over time, 80 to 90% of mutual fund managers fail at this.

So if you're thinking you can read some investing magazines, watch some investing shows on TV and pick some winner stocks, Swensen said, "it's basically a fool's errand."

"Professionals who devote their careers to beating the market have such a hard time beating the market. How can somebody who's casually spending, you know, a little bit of time on the weekends compete? They can't."

So what's the right way to own stocks?

4. Invest in index funds, not actively managed funds. And don't pay too much in fees

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Taking a piece of the pie.
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Swensen said to buy a slice of the entire stock market using low-cost, broad-based index funds. The Vanguard Total Stock Market Index Fund, for example, buys just about every U.S. public company for a very low annual fee.

Index funds differ from actively managed mutual funds, some of which charge fees that are 10 times what you'd pay for an index fund. Index funds are what's called "passively" managed — they just buy a list of stocks without trying to pick winners or losers.

In an actively managed fund, you're paying professional investors to pick a basket of stocks for the fund to invest in that are supposed to outperform the overall market. But as we say above, the vast majority fail to do that after you factor in the fees they charge you.

"When you look at the history," said Swensen, "the overwhelmingly right choice for investors is to take this index fund approach. And you'll be far better off than with the actively-managed alternative."

Exchange-traded funds (ETFs) are another form of passively managed funds like index funds. But Swensen cautions to avoid ETFs or index funds that are too narrow in scope. (Here's more on ETFs.)

5. Diversify your portfolio

Here's a sample recommended portfolio from David Swensen which he said will serve most investors well:

  • 30% in U.S. stocks.
  • 15% in developed country stocks.
  • 5% in emerging market stocks.
  • 20% in domestic U.S. real estate.
  • 15% in U.S. Treasury bonds.
  • 15% U.S. Treasury Inflation Protected Securities.

Experts say if you want to make big changes to your portfolio, again don't do it right after stocks crash. Some suggest what's called "dollar cost averaging" where you make a series of gradual moves over a year and a half to end up where you want to be.

As people approach retirement age and once they're in retirement, Swensen said things get more complicated. At that point in your life, many experts say it may make sense to get some professional advice from a financial advisor.

The investment firm Vanguard is run essentially as a nonprofit, and while Swensen said he'd rather not plug any one financial institution, its low-cost, nonprofit business model is rare.

Vanguard's founder, the late Jack Bogle, set up the company with the mission to give people a range of index funds and advice that's in the customer's best interest. And Swensen said people should know that.

"I wish there were 20 not-for-profit organizations out there that were serving investor interests, but there aren't," Swenson said.

Other investing experts recommend The National Association of Personal Financial Advisors, or NAPFA. It's advisors are "fee-only" which means they only get paid by you and therefore don't have conflicts of interest. Other advisors can make extra commission money by steering you into investments, such as actively managed mutual funds, that have high fees.

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The audio portion of this story was produced by Chloee Weiner. This story originally published Dec. 15, 2018. You can hear that original audio here.