The investor who owns common stocks has the executives of the public companies working toward the same goals as he, a rise in the stock price and increased dividends. Avoid art, gold, and tangible objects. The risk is too great, the commissions too high, and it takes years to gain the expertise required to recognize good investments.
The same can be said about playing the stock-trading game. You cannot afford the fees and unnecessary taxes or the time and energy required. Moreover, the average investor cannot buy reliable advice; not only is it too expensive, but in the long run it simply does not work. Even large institutions, which can afford the best, make mistakes and, over time, do not outperform the market.
The investor should concentrate on earning an adequate income and putting enough of it aside to initiate an investment program. The goal of investing is a seven percent annual return based upon a nine percent average return from common stocks over the past fifty years, adjusted by a two percent average yearly loss through inflation. TIPP involves four steps. First, the investor must determine the best risk-return combination for his needs. Then the investments must be diversified to avoid unnecessary risk. They must also be diversified over time to insulate against fluctuations of the market. Finally, the investor has to minimize transaction costs both in paying unnecessary fees and in spending unnecessary time.
The authors recognize the value of the ordinary investor’s time and realize that anyone who has a career cannot make the stock market a way of life. Even a fundamentalist system such as TIPP demands a large amount of work and analysis, especially so because it suggests the use of discount brokers. But, as the authors remind readers in the preface, “There is no such thing as a free lunch.”