Compound your interest (not your mistakes)
I have something to confess, something I’m really, super embarrassed about. At the start of the pandemic, I did something bad.
I panic sold.
Yes, I panic sold a bunch of shares in exchange-traded funds, or ETFs. The worst part was that it wasn’t even my panic; it was my husband’s, but he convinced me after several days of anxiety over what the vast unknown we were all staring into as the pandemic began settling in. But ultimately, the decision was mine — we have separate finances, and we each decide what to do with our money.
I’m really ashamed and embarrassed about this because it was an enormous rookie mistake. Selling in a panic is never a good strategy. All it means is that you’re locking in your losses. When it comes to investing, for most people, probably the best strategy is to set it and forget it. That is to say, buy your shares, then hold on and stay in for a long horizon. Over time U.S. markets tend to go up; even though the stock market, for example, doesn’t go up every year, when you average out, investors who stay the course come out ahead.
And beyond that, beating the market is *exceedingly* difficult. Beating the market — gaining more (or losing less) than the broad stock market or a specific index — does is just super super hard. Do you know who Warren Buffett is? Yes? Mega wealthy guy who invests a ton and makes a ton? You know why you know about him and why people practically worship him (not an exaggeration, I have met some of his shareholders)? It’s because almost *no one* is able to do what he’s done. He’s famous precisely because making those enormous gains, year after year, snowballing money into even more money, is extraordinarily difficult. I can tell you right now, I am not as smart as Warren Buffett, and I am certain not anywhere near as accomplished an investor as Buffett. I am happy to take the advice he has left for his estate after he passes, to put most of what he leaves behind in index funds and be happy making the same kind of returns as the broader market, rather than trying to keep racking up the outsized gains Buffett is famous for.
But what happens if you do what I did, and you make the blunder of thinking you’re leaving a sinking ship only to realize you let your emotions do your thinking? Well, definitely don’t follow my example here! I hated the idea that I had messed up. Still do, in fact! It was incredibly hard for me to admit to myself that I’d been so wrong. Then, I got scared about all the ground I felt I’d lost, and I kept waiting for a “good opportunity” to get back in, something to help me not be down quite so much in my portfolio. I kept convincing myself I had some idea of what markets would actually do, that they would go down a bit, or that a cliff was coming when an eviction moratorium would end, or that the longer lockdown kept going the more we’d see the fall I was waiting for.
Oh man. I was so wrong.
Eventually, of course, I swallowed my pride, licked my wounds, and bought back in. But here’s the thing: In delaying so long, in putting off reality, I compounded my error! If I’d just sucked it up and gotten back in months and months earlier, I would have suffered a lot less, both in terms of finances and in terms of anxiety and stress. Instead of compounding the interest on my assets, I compounded my error. It took a giant helping of humble pie for me to admit this.
Put another way: It’s like when you miss a couple days of going to the gym. Maybe you’re busy, maybe it’s a holiday, maybe you just don’t feel like it. Whatever, that happens to all of us. But then the next day you… still don’t go to the gym. And then you don’t go to the gym again… and again… and again. Until finally, you’re avoiding going to the gym just because you haven’t been going to the gym so you still don’t go to the gym and then you get more embarrassed about not having gone that you don’t go and on and on.
That was me last year. Don’t be me. Please.
