The urge to optimize is undeniable - to fiddle with, tinker and generally muck things up in an effort to make them “better”. Problem is, this approach can be counterproductive. Nowhere is this more evident than in the world of investing.
Warren Buffett, the most successful investor of all time, is a proponent of index investing for the average retail investor (you and me). This is a man who has been obsessed his entire life with reading about, researching, acquiring and collecting a portfolio of businesses for the purpose of investment. He’s devoted his life to it (he’s 94), he’s gotten quite good at it (he’s worth billions) - and he counsels us not to attempt active investing, because we have no hope of consistently outperforming the market.
Portfolio managers run active funds with the intention of beating the market. They might have a lucky year or even two, but over the long run almost nobody achieves higher returns than the market as a whole, especially when their increased fee is factored in.
The financial industry has been built up to complicate things and make us believe we need an expert to help us navigate the world of investing, an advisor who will separate us from our hard-earned savings via fees and commissions. They tell us they can do better than indexing. They can’t.
Our egos trip us up and make us think we can win at this game. In our infinite wisdom, we believe we can figure out which country and sector will take off, what company will be the rising star, and time our entry and exit perfectly. We can't.
The timeless wisdom is that time in the market is superior to timing the market. Messing with our investments causes problems. When we try to jump on a declining investment, thinking we are getting a deal, we may find we are catching a falling knife. The traditional advice of rebalancing our portfolio doesn’t make logical sense - why sell the winners? Let those ponies run. By leaving things alone, we will often do better than switching in and out of different investments. Plus, buying and selling usually racks up transaction fees.
The financial pundits justify their existence by generating noise designed to confuse us. Ignore the news, the talking heads, the panic of the day. Pay no heed to predictions about the state of the economy. No one can foresee where things are headed, so if they profess to know, run in the other direction. Remove yourself from the racket and don’t let it distract you. And for the love of Pete, don’t listen to your cousin’s stock tips.
These are the deceptively simple rules of investing:
Start early
Compounding works best when there is a long stretch of time over which to build momentum. If you’re finding this information later in life, not to worry. The best thing you can do is start now, and pass this information along to the young people in your life.
Be consistent
Just keep buying. Dollar cost averaging is the act of investing consistently, buying a set amount at a regular interval, regardless of investment price. This smooths out your purchases by buying more when the price is down and less when the price is up. It puts the first part of the cardinal rule of buy low, sell high to work for you automatically. Set up an automatic transaction for every payday. The less you have to touch it or think about it, the better.
Increase the amount as you can
Conventional wisdom says to save 10% of your income. More is better, if you can swing it. Instead of inflating your lifestyle with your raises, increase the amount you are investing.
Index
Choose low cost, equity index Exchange Traded Funds that are broadly diversified amongst sectors and countries. You don’t need umpteen different investments. One index ETF may hold hundreds or even thousands of companies. Instant diversification.
Leave it alone
Seriously. Go do something else. Fight the FOMO and resist the desire to tinker.
Over long periods of time, if you continue to invest and keep your hands off, you will see unimaginable compounding growth. Investing is quite simple - it’s a set it and forget it game. If you don’t believe me, check out this chart: 2024 the BigPicture®. One bonus about living in this timeline is that it’s cheap and easy to buy a piece of the market and just ride the wave.
Taking the simple route goes against the grain. Simple is not necessarily easy - you have your psychology to contend with. Lose your passwords; resist the impulse to check on your investments. Get out of your own way and trust in the process.
Investing is one of those paradoxical realms of life where you will be better off if you can just let it be.
If this work enriched your life even a smidge, would you considering giving a modest tip?
Another great read! Thank you so much for the post! Ugh... so much of this advice I need to stick with haha!
I wish I’d known this 50 years ago…