Well, I like to think I’m not really boring (although I do like to talk about personal finance and read a lot, so maybe???), but my investments sure are. Today I’m going to talk about how a boring, straightforward investing strategy works best for me. After years of financial experimentation, I’ve decided that advanced, active, stock picking type strategies are my enemy, and passive indexing is my friend. Let me tell you why.
Early Investing – A Bit Ignorant
Back in my very first IRA, opened as a teenager, I knew nothing about investing beyond what I had read in The Wealthy Barber. And although that book is a great overview of foundational wise saving and investing decisions, it doesn’t talk at all about what kinds of investments to select. So I relied on my father, who helped me select a Janus 20 fund.
Remember, this is back in 1996-1997, when the market returned 23% and 33% respectively. Everything was going up, and as they say, a rising tide lifts all boats. It certainly lifted the Janus 20 boat high, with it eventually reaching a peak it would never reach again – even now, almost twenty years later.
But in the late 90’s it flew high, doubling my initial investment in just a year or two. And so went my introduction to stock market bubbles. Of course, you know what happened, but my teenage self didn’t know what was coming. In April of 2000 it reached a high of $84 per share, and from there fell precipitously to under $30 a share by the time 2003 rolled around.
At the same time, I had also gotten a “real job” (full time job I used to put myself through college) and started investing in my 401k. I was putting in about 15% of my small salary at the time, and had something invested during the first significant crash I would see in my lifetime. My investments were all in active funds that I picked using who-knows-what methodology. I was still in the mindset that investing was a good thing, especially over long periods of time, but pretty ignorant of the best way to do it.
This was not exactly pre-Internet times (I’m not quite that old), but the internet was not the font of wisdom it would one day become. There was some financial information out there, but not much. Most of what I learned still came from reading books and magazines. And eventually, in the early 2000’s, I found my way to passive investing-and to Vanguard.
Indexing For The Win – I Saw The Light
I can remember reading the Morningstar DieHard forum (what would later spin off to the Bogleheads website) as well as several books by John Bogle at that time. Apparently the Morningstar forum is still there, just re-labeled “Vanguard Funds” and doesn’t look nearly as interesting as Bogleheads. This, coupled with reading in magazines and other books about finance and investing, convinced me that passive indexing was the way to go. So in the early 2000’s I invested all new money in Vanguard funds, and eventually changed my 401k investments to get as close to passive indexing as I could.
Why? Why was boring, “being the market” instead of beating the market, the best strategy for me?
There were several things that convinced me of the merits of the strategy:
- Few funds beat the market – I can’t remember the exact statistics I originally read that convinced me of this – it was nearly 20 years ago. But I did some research now, and it looks like over 90% of large-cap funds lag the S&P 500. This convinced me that I don’t have any magic powers that would allow me to pick the less than 10% of funds that would beat the market, so it was better to be the market and gain the market returns
- The best returns come to those who set it and forget it – As in, literally forget it. Fidelity did a study some time ago and found that the best performing investors forgot they had a Fidelity account. Why? Because they didn’t buy and sell on their whims. You – the average investor – lag pretty much every investment class return because of your own behavior biases. Want to know more? Check out Dalbar’s annual quantitative analysis of investor behavior. The average investor significantly underperforms in various asset classes.
- Time – As in, I didn’t have much of it. Yes, I enjoyed reading and learning about personal finance and investing, but I didn’t have the time to research individual companies to feel that I could do justice to buying individual stocks. At 23 I was a new mother, and pretty broke. I was also getting started in a career and a few years later, starting an MBA. Passive investing gave me back my time by making it so I didn’t need to worry about beating the market.
This is in the days before Vanguard was cool in the FIRE (financially independent, retired early) community, and even before J. L. Collins published his great site outlining why you should keep it simple. I choose Vanguard because they were the lowest cost, index fund leader at the time. There were no ETF’s and other companies weren’t yet competing on expense ratio. And even now, when Vanguard is no longer the low-cost leader sometimes, they still offer the best, widest selection of various low-cost index funds that I’ve seen. I keep it boring – and keep it simple – by sticking to a few funds in the basic asset classes, and then forgetting about it.
Keeping It Boring – And Staying The Course
Whenever I talk with other people my age, they almost never have similar investing experiences to mine – unless, of course, they’re a fellow personal finance blogger. As a 37 year old, most of my peers did not have much (if anything) invested in the crashes of 2000 and 2008. I, on the other hand, got to have the experience of losing $40k in the Great Recession. Today I consider it a gift. In the wake of almost ten years of positive market returns, many people my age and younger don’t remember the lessons of time gone by when the market went in half. They think that they’ll just buy the dip, not knowing what it actually feels like to watch years and years of savings evaporate in a matter of days. Or the feeling of investing for a decade and not seeing those investments pay off until almost fifteen years down the line.
It’s similar to how I would feel hearing about Black Monday in 1987. I was seven years old at the time and have no memory of the event. Sure, it sounded bad, but I didn’t really understand how bad it felt until 2008. Looking back in the rear-view mirror of the investing car from the year 2017, you know how those events ended. But in the middle of them, you don’t know how it’s going to end. You don’t know if the crash will end with a “lost decade” of no returns for ten years, like the 2000’s, or if it will be the start of a bull run like the crash of 2008.
By keeping it boring, and my investing simple, I have no issue with staying the course. In 2008 I was scared, especially watching the market dropping by almost 1,000 points a day, but my husband repeated back to me what I had told him many times before about staying the course. So I did, and I pulled an ostrich and just stopped watching my accounts for a while. My net worth tracking stopped during the worst of it, and picked up again when the market started to turn back. I had no way of knowing that would be one of the best financial decisions of my life. When coupled with the fact that I started and continued investing during the entire first decade of the 21st century (when most of my peers didn’t even know what a 401k was and certainly weren’t putting money in them) it set a powerful foundation for the recent bull market to act on.
I don’t count on it though. In fact I assume it will crash at some point, and when it does, I will… do nothing. I may rebalance if it gets too bad, but that’s it. The value of having a personal investment policy statement is that you can create it when things are going well, and look at it to remind you of what you were planning to do once things go bad. It helps prevent emotional decision making in the heat of a market crash.
So be boring. Stay the course. Forget you have your financial accounts. Figure out an investment strategy, set it, and forget about it and go live your life. You’ll lose more money in endlessly trying to tweak and find the “optimal” investment strategy than you will in choosing and sticking with something simple.
Are you also boring? Let me know in the comments. We can be boring together! 😀
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