The Ten Commandments of Index Investing

Much of life is too complicated to be boiled down to just a few simple rules to follow.

But it is possible to make investing clearer and simpler than the media and financial services industry have.

So listen up heathens…here are the 10 commandments of simple low-cost equity investing.

1. Know thy purpose

Money is a tool that you can use to enhance your life and buy more freedom.

What matters is purchasing power…the amount of freedom that your money could purchase.

What is your runway? How long could you go without working?

2. Thou shalt get paid to bear risk

You need the power of compounding on your side. This means you should not be trying to eliminate risk but rather aiming to grow your purchasing power. There is no reward without risk.

No risk it, no biscuit.

3. Know thine enemies

The enemy is inflation, the inevitable, slow and steady erosion of purchasing power. Your cash savings are like an ice sculpture at a party. You can’t see your cash melting away…but it is.

Fear, lack of understanding and procrastination all work with inflation to kill your dreams.

4. Thou shalt own The Great Businesses Of The World

A global equities tracker allows you to own The Great Businesses Of The World.

Historically, equities have been the best performing asset class. Companies have the ability to raise prices to pass on inflation. Equities therefore have in-built inflation protection.

5. Thou shalt forsake gambling

..and desist from all forms of spivery.

The ideal holding period is forever. When you understand how powerful compounding is, you never want to interrupt it voluntarily. Short term trading is gambling.

Stock picking can be fun. But it can also be a form of gambling.

6. Thou shalt not time the market nor make predictions

The demand for market forecasts creates its own supply. Yet the timing of market drawdowns can not be reliably predicted and often these do not coincide with economic recessions.

Do not bear false witness. There are 2 types of people: those that don’t know how to time the market and those that don’t know that they don’t know how to time the market.

Dollar cost averaging is your friend…especially during times of volatility. 

7. Thou shalt reduce fees

High % fund management fees are slow death.

If you buy a more expensive car, it generally goes faster. But if you buy a more expensive fund, it generally grows slower.

As the great Jack Bogle said: when investing in funds, you get what you don’t pay for.

8. Thou shalt not artificially suppress volatility

To earn equity returns, the investor has to pay the price of admission: market volatility.

Volatility can only be avoided by sacrificing equity returns. You can add water (bonds or cash) to your whisky (equities) but other forms of volatility suppression are flawed.

Insurance is expensive. Most hedge funds are shite. Structured products and high yield fixed income (e.g. peer to peer lending) have a nasty habit of blowing up.

9. Thou shalt not sell in panic

The market riseth “up the stairs” and descendeth “down the elevator”

In other words, the falls are sharper than the rises. On average the investor can expect a decline of ~30% roughly every 5 years. There have been two falls of ~50% peak to trough in the last 20 years. Are you ready for the next one?

Never, ever, ever sell in panic during a market crash.

Turn off your screen. Go for a run. Bite on a stick. Do anything but capitulate.

10. Thou shalt learn from mistakes

I learned a lot of this myself the hard way.

Most people can’t beat the market but that doesn’t stop people trying. If you’re human (and I know that many of you are) you probably won’t just buy one global tracker fund and hold it forever.

It’s fine to experiment…and failure is often the best teacher. But generally it’s better to learn from other people’s mistakes. So don’t be scared to get help.


After I wrote this post, the guys from The Money Plant Youtube channel kindly made this video:


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6 comments

  1. When I occasionally mention I invest in shares, every time I am told it’s too risky. I reply, how can owning over 6000 of the best businesses on the planet over the course of many years possibly be risky?

  2. John of Hampton · · Reply

    I have also found people who tell me that shares are too risky. I suppose that having savings in the bank (interest rate 0.2%) with inflation at 0.5% carries no risk at all. Instead it has the unfortunate certainty that you will lose out. Me, I can’t see why that is better, but it obviously suits some people’s mindset.

  3. I like to keep some cash in reserve to invest during market crashes

    1. Rudolph · · Reply

      “Commandment 6. Thou shalt not time the market nor make predictions”

      You apostate!!

  4. Hi TEA,

    I’m a fellow index investor and a big fan of yours!

    Recently, I have found a product that made me think there may be a better way to invest than indexing. I came across a product (when searching for index funds by sorting investments by lowest fees), that charged a 0% management fee, and a 50% performance fee on its performance above the index (in this case MSCI world). If the fund unperformed, 50% of underperformance is refunded to the fund. If there is not enough money in the designated reserve store, then a reserve marker is used to only charge a fee once any unpaid refunds are earned back. I’ve listed the relevant quote from the Key Investor Information Document and a link to the KIID below.

    It seems to me that this structure is a good alternate option to indexing, as your interests are aligned with the fund managers. If they don’t do better for you than you would have done in the index, they can’t eat. A risk with this type of fund that springs to mind is that a manager could setup such a fund and go for extremely risky investments hoping to outperform, lose everyone’s money and then have a reserve marker so low that he closes down the fund and opens another one. It seems to me that buying a fund that has been around for 5 years+ would help to limit this risk. What are your thoughts on this type of fund? Do you think it’s worth trying?

    “The performance fee is 50% of the outperformance of the Fund over its Benchmark. The fee is paid out of the Standard Share Class and invested into a Reserve from which the manager draws periodically when there is sufficient value in the Reserve. The performance fee is refundable to the Fund at the same rate (50%) in the event of underperformance relative to its Benchmark in future periods when there is value in the Reserve. The performance fee is not charged for periods when the Fund is below its Reserve Recovery Mark.”

    https://doc.morningstar.com/document/236be3af33ca22f6f5ffb1ee5d3e8a13.msdoc/?clientid=ajbell&key=805803a4ca9fc338

    1. Apologies, that was the wrong link. that one tracks 60/40 Bonds/Equities – This is the one for MSCI: https://www.orbis.com/documents/Orbis%20Global%20Equity%20Standard.pdf

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