But what about the Warren Buffetts and Peter Lynch's of the world? Don't they outperform the markets?
Buffett and his school discovered decades ago that stocks with certain characteristics tend to do better over time. He buys companies that are cheap, and are very high quality, with high quality defined as having a low debt to equity ratio, low earnings volatility, and high margins. Warren Buffett himself has had trouble outperforming in the last 15 years, as it has become easier to replicate his investment style.So what's an average investor to do? Swedroe says the first thing to do is to decide what your risk tolerance is — the higher the risk, the higher a percentage of stocks to bonds you can own. For example, many fund managers recommend the traditional 60/40 split — 60% in stocks, 40% in bonds.
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