For Successful Investing, Think Long-Term
Hello dear,
By now I’m sure you heard the news of a New York couple who committed suicide last week by jumping off a building. Apparently, they did it because they were struggling with $200k+ in debt.
I won’t link to it. The above summary is horrible enough and you don’t need more negativity (or more details).
So why am I mentioning it? Well a) because many people shared the story with me since I write about finance and b) because I want to remember it as a cautionary tale.
Sidenote: I won’t judge that couple (I don’t know what other problems plagued them). But I want you to always remember $200k in debt is not that much! This guy paid off $91k in debt in 10 months. Even Chris Sacca managed to pay off his $4 Million debt. If you’re following this series, you know you can handle $200k in debt in less than 5 years.
Whenever I talk to people about money, one of the most common replies is something like “I don’t want to focus on saving money, I want to spend it while I can. You know… I want to live life.”
Or this jewel “stop focusing on money so much, money doesn’t bring happiness. Have fun while you’re young!”
I really fail to connect with those people.
Sure, after a certain amount it doesn’t matter how much money you have.
But I can guarantee you, a person in debt is an unhappy person.
I can also guarantee that worrying about bills for the rest of your life is not fun.
You know what’s fun? Freedom.
Freedom from financial stress. Freedom from working a job you dislike only to pay the bills. Freedom from the risk of having no money when you’re old.
So here’s my advice: Until you’ve achieved financial freedom, take money very VERY seriously.
The alternative is just plain wrong, immature, and (sometimes) fatal.
Sidenote: I call it freedom (c’mon this is a family-friendly blog), but John Goodman calls it “f*ck you money.” Feel free to pick your favorite.
Ehem… On that note. We have a letter to get to!
Onward.
The Number One Argument Against Index Investing
As you probably know by now, I am a big proponent of Index Investing (specifically, with Vanguard).
However, the most common argument I’ve heard against it is “people won’t be able to handle the stock market drops. They’ll panic and sell.”
If you don’t understand this argument, it’s quite simple:
- I recommend you buy an Index Fund (VTSAX) and hold onto it for 30 years minimum.
- However, between now and then you will witness 2 -maybe 3- crashes (similar to the dot-com crash of 2000 and the financial crisis of 2007–2008).
- When that happens, your money will drop substantially (e.g.: if you put $100,000 into VTSAX in 2006, 3 years later you’d have $62,000… Yikes).
- The people arguing me say you’ll panic and sell your stocks whenever your net worth goes down that much (which means all you did was lose $38,000. That’s bad).
You know what? They have a good point.
However, if you do that, remember the issue wasn’t investing in the stock market. The issue was your brain! You sold too soon!
“Emotions get ahold of us, and we, as investors, tend to do very stupid things. We tend to put money into the market and take it out at exactly the wrong time.” — Burton Malkiel
The Short Term = Gambling
If you look at any company’s stock price over the last few months, it looks like a rollercoaster.
For example, here’s an image of Google — I mean Alphabet’s stock price over the last 3 months:
Complete chaos, right? It would be crazy to check the stock price every day (you’d drive yourself mad).
Now, look at Goo — Alphabet’s stock price over the last 13 years:
Granted, it looks crazy if you zoom in on the details. But when you see it from up here, you can clearly tell it has grown steadily.
Why do we zoom out? Because investing over the short-term is a gamble.
For example: I could write a silly blog post tomorrow titled “why Tesla will fail”. If it trends, people will read it, many will sell their stock, and the price will drop.
That’s all it takes.
Now imagine if their earnings don’t look good, or if someone gets in a car crash because of autopilot, or if Elon coughs heavily during an interview. People will freak out!
Simple silly things cause prices to move up and down like a rollercoaster.
So, why should you bother with checking daily price fluctuations?
I’ll answer it for you: You shouldn’t.
You cannot predict what will happen tomorrow. So I recommend you don’t even try.
This is parallel to going to a Vegas casino (which is still fun). The only difference is when you’re in Vegas, you don’t say “I’m investing.” (I have to thank my friend Daniel for this hilarious comment. So, thank you my friend Daniel).
“In the short-term, stock prices go up only when the expectations of investors rise, not necessarily when sales, margins, or profits rise.” — Roger Martin
The Long Term = Investing
Once you stop looking at the stock market in terms of days, months, or even single years, you get into real investing territory: decades.
Why? Because over the long-term, you’re being less speculative.
Over the long-term, prices don’t fluctuate because of news stories or gossip, prices grow with their companies.
Still, this doesn’t mean you should invest serious money in one specific company. Here are a few reasons why not:
- You don’t know which ones will grow much more in the next 20+ years (the way Apple and Amazon did).
- A specific stock’s price is usually driven by crowd-behavior. Ask around. Chances are your friends hold Facebook, Tesla, Netflix, or Amazon stock right now. Therefore, the likelihood these company’s prices are inflated is very very high.
- The likelihood of any one company still being around (or dominant) 30+ years from now is very very low. All it takes nowadays is two kids in a garage to dethrone a giant.
However, you know what will keep growing and be around 30, 40, and even 50+ years from now? The entire stock market.
“The Dow started the last century at 66 and ended at 11,400. How could you lose money during a period like that? A lot of people did because they tried to dance in and out.” — Warren Buffett
The Market Always Goes Up
So now we know two things: 1) invest in the long-term and 2) invest in the entire stock market.
Statistically, this is the best way to increase your chances of investing success.
I’ll repeat, the stock market will still be around (and if it isn’t, you’ll have bigger things to worry about than just your money).
Not only will it be around, it will be much higher than it is today.
The stock market always goes up.
This is why I say “put your money in VTSAX, and forget about it for 30 years, no matter what happens”.
Here are a few examples of how this strategy would have worked in the past (using the S&P500 Index from this cool website because most others suck).
Let’s take some of the worst 30 years in the history of the world, 1930 to 1960.
If you had invested $100,000 in 1930, after 30 years you would have $1,307,000.
This despite “a few” bad events like the rise of Nazism, the Great Depression, the severe drought in America leading to the Dust Bowl, World War II, and the beginning of the Cold War (among many many more).
It doesn’t matter, you would still have become a millionaire.
“Yeah but that was back then, today things are getting worse every year”
A lot of my Facebook friends seem to believe this nonsense. Let’s test the last 30 years and see if things are indeed getting worse.
If you had invested $100,000 in 1987, today you’d have $1,786,000.
This despite 9/11, the dot-com crash, the Iraq war, and the financial crisis (among many other things).
So there you have it. The stock market always goes up.
“The market is up 77% of the time over 1 year, over 3 years it’s up 90% of the time, over 5 years it’s up more than 95% of the time, over 10 years it’s up 98.5% of the time.
So in the short run, the market is incredibly unpredictable. In the long run, it’s extremely predictable. […] People believe the market goes up and down, that’s not true. The market goes up.” — Peter Mallouk
However, When You Sell Matters
I told you not to care about stock prices over the long-term. But there will be a day when you will care.
Do you know when that day is? Yup, when you sell.
So what do you do if you invested in VTSAX, and 30 years later you want to sell but the market crashes (like it did in 2008)?
Easy, wait another 5 years or so.
In fact, the longer you leave your money in the market, the more it will grow.
Say you went back 60 years and invested $100,000. Today you’d have $32,553,000(!!!).
This Thanksgiving Dinner, ask your grandparents why didn’t they leave that sweet little gift for you.
Sidenote: I’m kidding about the grandparents thing. Vanguard didn’t exist until 42 years ago (so index investing would have been very very very hard). However, there’s no reason you can’t leave an awesome gift for your grandkids 🙂
And that’s it for today!
Today, you learned:
- Your biggest enemy when investing is your own brain.
- Hopefully, you also learned why you shouldn’t listen to it (and why you should turn off the news).
- If you can’t control your emotions, don’t invest.
- If you can control your emotions, you’ll likely be very rich someday.
See you next week (follow the series here to be notified).
Be well.
R
Since I write about finance, legal jargon is obligatory (because the guys in suits made me). Before following any of my advice, read this disclaimer.
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