When I wrote From Zero to Sixty on Hedge Funds, I deliberately kept from giving any sort of investment advice. It was not that kind of book. Investment advice is tough and most of the time it requires some sort of time stamp. It also spoils quickly. Something that sounds good when you write about it in March becomes the butt of jokes in April. But after a while, I came across something that I think is pretty interesting and when incorporated into the context of a proper investing mindset and style, would work many times out of ten. I want to write about it in this post here.

The Parable of the Little Sister

Let me start with a parable about my little sister. Back in 2009 she had come across a little bit of money and she had no idea what to do with it really. She figured that she would do this “investing” thing that she had heard about. Up until then I had been investing my own money on the side since 2005. I thought that I had known what to do with it. My little sister, who knew virtually nothing about investing, asked me to pick some stocks for her. I knew a few things about my little sister. One is that she would be affected by the swings in the market. She is one of those people who just did not care. She hardly knew what a stock was other than that you can sell it. She also would not be happy if she lost money in the market. She would not be able to buy boba drink and food. The last thing I knew was that she would not be needing the money for a very long time.

In other words, she is a conservative, wait-it-out investor. I figured then that the most conservative, stable stocks would make sense for her. I figured that the portfolio would not grow, but it would not lose a lot of money either. It would be like one of those ovens that you see on the television. Set it and forget it.

I ignored everything that was buzzing about my brain at the time - stuff that I do not even remember myself - and just picked for her the most ordinary stuff. It literally took 10 minutes to set her portfolio. Some Procter and Gamble (PG), Johnson and Johnson (JNJ), and the crown jewel Vanguard Total Market Index (VTI).

My little sister still has those stocks now, four years later. And they have grown over 60+% for her. More if her broker lets her reinvest dividends. It unfortunately does not (for godssakes never use Bank of America Merrill Lynch and she is just too lazy to switch brokers). She literally has not spent more than 5 minutes a year thinking about this portfolio. She might have missed out on the higher returns that some other people, but in terms of return per unit of stress, she wins hands down.

Making it Simple

The simplicity of my little sister’s approach is part of why it works. She knew exactly what she needs or does not need to do in order to make her investing life successful. As long as she plays her game, then she is unbeatable at it. Out of my entire family, my sister is the one whose portfolio has grown the fastest per ounce of energy spent.

Her success got me thinking. I had just come out of a three month sequence where I day traded Apple, PriceLine and Google weekly options, which are complex financial derivatives that are known for their extreme volatility. I lost over $12,000 in this market in just 3 months, which is pretty incredible. You will hear more about this story in a future but it took a lot to quit. When I finally did, I was exhausted. I was tired of seeing the eTrade screen and wanted to just move away from it for good. I was ready to take the Little Sister approach. I started to research companies that I wanted to invest for a long time and not care about.

I was interested in something that had all the stocks that I wanted to buy for my little sister but package them all into just 1 ticker, making it easier to buy and easier to recommend. Rather than saying, “Oh a little bit of this and a little bit of that”, I could just say, “Hey buy this then.” It would be the stock that I would recommend if I ever get that generic question, “Hey I have some money to invest. What should I buy?”

This investment would be safe enough for me to comfortably recommend to friends and family. These are people I personally know who may lose money from what I pick! It has the potential to be very awkward. It also has to be really simple to explain. I should be able to explain the reasons to own this particular investment without using a chart or a lot of complex financial theory. At the same time the investment has to offer enough reward to not make this utterly boring.

This is because I think that at some point you just need to find something that is decent and stick with it. You can do better on your financial and mental health if stay with something decent for a long time rather than something phenomenal but drives you crazy and you are constantly stepping in and out of.

I am going to settle with VYM and I am going to tell you why below.

VYM

VYM is the stock ticker for the Vanguard High Dividend Yield Fund. It has $9.5 billion under management. This does really mean anything except to indicate that the ETF is pretty liquid. This is good because it lets you buy and sell the shares very easily on the market without having to sell/buy at the wrong price or wait too long for your order to fill. It is run by Vanguard.

The best way that I can use to describe an ETF is that it is kind of like a company except its sole goal is to hold other companies’ shares. You would buy the shares and through owning one share of this ETF, you own a proportion of shares of other companies.

My criteria in selecting VYM as the aforementioned “generic recommendation investment” is the following:

An ETF With Low Fees

It had to be an ETF to help diversify your risk and get as much of the market’s performance as possible. This meant that it had to have very low fees. You do not want to pay a lot of money in fees the ETF’s provider. A high fee count (usually 1% or higher. 2% is hedge fund status) sucks away your investing performance.

I liked Vanguard for a few reasons. First is that they are a very large fund family. They are pretty no-nonsense and I like their philosophy of low cost indexing. Second I also like that their incentives are aligned with the investors. The other big fund families are iShares and WisdomTree. Both are publicly traded. iShares is owned by BlackRock (BLK) and WisdomTree is WETF. This is pretty cool, but it means that they are never going to be fully incentivized to deliver the lowest fees to you. Vanguard is not a publicly held company. Its shares are held by the very funds that it manages. So when you are a VYM shareholder, you not only own the shares in the ETF, but you own a bit of Vanguard too.

Second, the fees are really low. They are charged as a percentage of how much you own in shares. If you own $100, then 1% means that you pay $1 a year. VYM charges 0.1%, which is pretty much the lowest you can go in terms of anything other than the total stock market (which is something like 0.05%). So this means that if you own $100, then you pay 10 cents a year. That is fairly low. Better yet, the fees trend lower than higher. Every so often Vanguard cuts their fees. A few years ago it was at 0.14%.

The Portfolio is Good

VYM holds 388 companies with a median market cap of $115 billion. This means that companies in the index are not likely to disappear anytime soon. It is evenly distributed across a number of industries with at least 10% in Consumer Goods (15%), Financials (12.8%), Health Care (12%), Industrials (14%), and Oil/Gas (12%). These companies are weighted to the SP500 and are selected for their higher than average dividend yield.

I was looking for companies that return capital to their investors often. If you dive in the financial theory, there is an argument that you can make for investing in companies that do not pay a dividend like Berkshire Hathaway, where a company can do better with the excess capital than you can. However, in reality, there is little psychic dividend that you can get from a dividend-less company. Receiving a dividend credit for holding shares in a company is immensely satisifying even if mathmetically you are doing nothing more than deducting from the principal stock price of the shares. For many people, I consider that more important because it contributes to good investing habits. Having that mental satisfaction means that people stay invested for a long time.

I was looking for companies that are the backbone of the US economy and boast huge moats. Even if they did not, then it does not matter. If such a company would start to decline and vanish, the index would remove them from the ETF.

The top five holdings are:

1) Exxon Mobil 2) Johnson and Johnson 3) General Electric 4) Chevron 5) Microsoft 6) Wells Fargo 7) Proctor and Gamble 8) JP Morgan Chase 9) Pfizer 10) AT&T

All of these companies pay a good dividend, are dominant in their field and exhibit low volatility. Low volatility means that the prices are less likely to swing a lot from day to day. This is important because maintaining prices means that if there comes a time you need to sell your shares for whatever reason, it is likely that you are not selling into crippingly low prices.

The Dividend is Decent

A high dividend yield ETF should do better yield wise than that of the SP500, which is generally the standard people go by as the market. It changes from time to time, but the SP500’s dividend yield as of August 2013 is about 2%. Right now VYM yields about 1% more than that with 3%. Yeah that is not a lot. I am going to admit that. However it builds up over time. And when the stock price goes down, the yield goes up. There is an opportunity then to buy a lot more shares.

No, it is not like Annaly or AGNC’s 20% yield. But unlike those companies, the yield from VYM is stable. Wherever I have looked for something with a higher yield than that 3%, the things that I have found also have issues that concern me. 3% seems to be the best you can do without delving into things that might keep you up at night. I am through with that crap.

How to Use VYM

I am not going to just tell you the name and then leave you to fend for yourself. I am also providing user instructions. No diagrams, though because I cannot draw.

• Buy when the price goes down

• Reinvest the dividends, which come once every three months

• If the price goes up and you have some money, buy some more

• Sell when you absolutely need the money. Otherwise, leave it alone

• In fact, do not even look at the price quote from day to day. It’s not going to change a lot

Simple Strokes for Simple Folks

Some great things that I have heard about investing over time:

• Trading is hard and it should be done by people who care for it. Not everyone does. That is okay.

• Hedge funds charge high fees. They are not always deserving of these fees.

• Action is the enemy of the investor. The less you do, the better.

• You are not going to get rich investing.

• Doesn’t really matter what you do. Just that you stick with it.

• Buying stocks should be like buying a car for most people. Do not opt for the yellow Beetle with the Pikachu tail. Buy the Corolla.

I like the last one the best, especially as someone who cares very little for cars. You do not buy the exotic electric vehicle if you need it to help you get to work and the grocery store everyday. There is a time and place for it. Same with stocks. Buy the Corolla for investment vehicles.

There are many in my peer group who are big on real estate. Their entire young adult lives they are saving so that they can put down that $60-80K for that 20% down payment. I am not excited about that particular prospect myself. If that is how you want it, then yes you should go buy that first house. There is merit in your approach and the more important thing anyway is how you raise money for that investment - steady saving and living below your means - but I have been a stock guy for a very long time. I like that it is a living, breathing asset - an entity that does not die or get injured. A share of stock does not get hit by a volcano in Hawaii. Does not get older or tarnished. It keeps its freshness over time. I think that is something pretty valuable.

As for putting my money where my mouth is, VYM is the second largest investment that I have in my portfolio.