The Backpacker’s Guide to Investing – Part 2

In Part 1 of The Backpacker’s Guide to Investing, we talked about the importance of having a well-thought-out investment plan (as well as a backup plan, since the unexpected should always be expected).

I also shared why you should always take advantage of limited resources when they are available, because once they’re gone, they’re gone. This includes investing as soon as possible to lengthen your time horizon and the power of compound interest, as well as getting 100% of your employer’s match.

If you haven’t already read Part 1, I’d encourage you to start there first.

Today, we are going to talk about how weight affects what you pack on the trail and why I’m happy to wear some functional, but pretty ugly clothes in the backcountry. Here’s Part 2 of The Backpacker’s Guide to Investing:

4. Weight is Your Enemy

As a backpacker, you generally want to keep your pack as light as you possibly can. This not only spares your back from unnecessary strain, but it will also allow you to trek longer and further since you won’t be burning as much energy.

Likewise, as an investor, you need to keep as much weight out of your portfolio as you can. This weight primarily comes in the form of unnecessary commissions, investment expenses, and taxes.

It’s very common for a typical portfolio to be dragged down by 3% to 5% in fees, expenses, and taxes every year. If your portfolio is earning 6% to 8% per year, that’s a huge burden and will eat up 50% or more of your return.

That’s why you need to be very diligent about keeping your expenses to a reasonable level and employing a tax efficient investment strategy.

Simply put, don’t squander your hard-earned money by paying unnecessary commissions or fees. There’s absolutely no reason to pay a load to buy a mutual fund these days. Likewise, you shouldn’t be paying more than 0.20% to 0.40% in annual mutual fund or ETF expenses.

Finally, it’s critical to understand the tax implications of your investment decisions. Ignoring taxes can erode the return potential of your investments.

5. A Few Things are Worth the Extra Weight (or Cost)

Part of the enjoyment of venturing into the mountains is the reward of getting to camp near a lake, river, or other natural beauty.

Ideally, that means setting up your tent in the early- to mid-afternoon and still having several hours of sunlight to relax in.

To really get the most out of the trip, I always pack a few things that are absolutely worth the extra weight:

  1. Sandals – There is no better feeling than tossing your hiking boots aside and throwing on a pair of sandals after a long hike.
  2. A book – Whether it’s a paperback or a Kindle, being able to spend a few hours reading in the peacefulness of the wilderness is unbeatable.
  3. Coffee – It doesn’t weigh that much, but even if it did, no one is taking my morning cup of joe away from me.

I’ve also invested in several items that either help reduce weight or make for a much more enjoyable adventure. Are they more expensive than the alternatives? You bet. Are they worth every penny? You better believe it. Here are a couple:

  1. GSI Pinnacle DualistAs a backpacker, this is the greatest thing since sliced bread. It packs two bowls, two insulated mugs with lids, and two collapsible sporks all into a pot with a strainer lid. The pot then fits inside a molded stuff sack that doubles as a wash basin. On top of that, my ultralight stove and fuel fit inside. And the entire package weighs just 21.6 oz and is the size of a 6″ by 6″ box. It’s incredible.
  2. REI Lite-Core 1.5 Self-Inflating Sleeping PadSleeping on the ground isn’t fun. Neither is carrying one of the huge roll-up mats you can buy for $20. Instead, every backpacker should get a lightweight, compressible air pad. The one I bought from REI quite a few years ago weighs just 27 oz. and stuffs into a sack that measures only 5.5″ by 10.75″. It’s way more comfortable than the foam pads and takes up a lot less space.

When it comes to investing, the same principles apply. The costs of investing have come down dramatically. Almost to zero in some cases.

You can purchase index funds for free and the cost of ownership for a basic portfolio will run you 0.10% or so per year (and probably less after you factor in securities lending offsets).

Likewise, you can minimize taxes through smart planning. Obviously, this means maximizing tax-deferred and tax-free retirement accounts. It also means intelligent portfolio design and management in your taxable accounts.

However, are there instances when it’s worthwhile to carry a little extra weight or pay more for a better solution? I believe so. Here are a few examples:

  1. Diversifying internationally – Investing in international developed market stocks costs more than it does to buy U.S. companies. The same is true of emerging market stocks. However, both provide a clear opportunity to diversify the equity side of your portfolio and investors would be foolish to pass up the opportunity.
  2. Diversifying across risk factors – Likewise, employing a factor-based investment approach, whereby you seek to invest in specific types of stocks with unique risk/return characteristics is also more expensive. That said, the diversification benefits and higher expected returns from smaller stocks, value/low-price stocks, profitable companies, etc. clearly outweigh the higher expenses of owning such funds.
  3. Professional advice – I’ll start this by saying I could easily be accused of having a bias here, but I’ll make what I believe is a genuine case anyway. I believe that unbiased, high-quality advice is often worth more than you pay for it. This can be true with anything from hiring a lawyer to getting a home inspection. Sometimes that advice protects you from making poor decisions or finding yourself in hot water. Other times professional advice can add a significant amount to your bottom line. In still other cases, the time and effort you save by hiring a professional is worth it to free your life up for other things. When it comes to working with my clients, it’s almost always a mix of all three.

John Bogle is famous for saying, “In investing, you get what you don’t pay for.” In general, he’s absolutely right. However, I think smart investors would agree that there are indeed a few things that break that rule of thumb.

6. There are No Points for Style

There are several things that I wear on a backpacking trip that I wouldn’t exactly call fashionable. In fact, the only times that I wear or use these things are on hiking trips.

Such items include a sun hat, a mosquito net, and pants that convert into shorts.

Why do I wear them? Because they work. Without these things, my trip would either be miserable or would require me to pack extra weight.

As investors, not a day goes by that we don’t hear about the latest hot investment or guaranteed way to make money. Whether on CNBC, in the Wall Street Journal, or at a networking event, who hasn’t had been intrigued by one or more of the following:

1) Hot stocks, IPOs, or fund managers
2) Non-public real estate investments or developments
3) Private equity
4) Hedge funds
5) Start-up businesses or angel investments
6) Currency trading
7) Wall Street products that provide “market upside and no downside”

I could go on and on. However, the independent research and evidence behind such investments, isn’t good.

The returns rarely hold up to the lofty promises of the people who pitch the investment, particularly after you adjust for fees, taxes, and risk.

And you’d better carefully understand the risks. Far too many times I’ve seen investors lose large sums of money or find themselves personally on the hook for debt because they didn’t take the time to understand the commitment they were making.

That’s why, the message about investing should be clear: There are no points for style!

Returns aren’t delivered because an investment sounds exciting or makes for entertaining conversation at a cocktail party.

The majority of strategies and investments that have a strong track record of delivering results for individual investors are somewhat lacking in panache: diversification, asset allocation, discipline, low fees, low taxes, index funds, etc.

If you want to buy the latest “hot” investment, just remember that it will likely do more for your talking points at a party than it will for your bottom line.

Part 2 Wrap Up

I’m sure there are more parallels between backpacking and investing that I’ve missed. However, the points at the end of the day are pretty simple:

  1. Have a well-thought out, written plan
  2. Prepare in advance for bumps in the road
  3. Don’t miss out on critical, but limited opportunities
  4. Avoid unnecessary weight that limits how far you can go and how fast you can get there
  5. Know when carrying some extra weight or paying for better stuff is worthwhile
  6. Seek function over form if you want to be successful

If you follow these tips, I’m very confident you’ll do well. If you’d like some help, let me know.

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