When it comes to investing, our biggest challenges are usually ourselves.
As I write this:
It’s natural to be a little scared.
And human beings are strongly averse to loss – we feel the pain of loss far more intensely than we feel the joy of gain. This has an evolutionary advantage because when a lion bites your face, it’s the ball game. No matter how many berries you’ve picked, how many offspring you have, or how many dollars you’ve accumulated, your face is gone.
We take that in modern life and we see a sea of red in the stock market and wonder if it’s time to slow down our investments. Maybe we want to stop.
We know it’s always market timing, but we don’t care. There is so much red.
Today I’m going to share with you how I convinced myself to keep investing during times of volatility and loss:
- 🤖 Automate your investments
- ⌛ Increase your time to market
- ✈️ Take a view from 30,000′
- 💸 You get a discount
- 👀 Stop looking at the market
🤖 Automate your investments
When I worked at a company, I regularly contributed to a 401(k). It was set up when I first started, I reviewed it every year, but I never had to manually transfer money.
Saving for our retirement was automated.
This meant that from 2003 to 2008, when I was working full time, I regularly contributed to a nest egg that I hadn’t contributed to since 2008.
This is what my Rollover IRA performance looks like [my current retirement contributions go to a Solo 401(k)]:
By saving regularly, this nest egg is able to grow over time to a significant sum. Unsurprisingly, the returns on investment exceeded my contributions.
Automating your savings is valuable because it takes that monthly decision away from you. We can do it because it’s money we won’t need for a few decades. I lock him in a time capsule and hide the key.
The inertia is real. If you have to take action to save, you are less likely to save. At this time, we must take action NOT to save…
When I started self-employed, I continued this automation because it was important to get me out of the process. Every month, we make a contribution to Vanguard. I even disable notifications because it’s still annoying to receive the notification email on a day of a market drop (confirmations are sent the day after a contribution).
If you do nothing else, automate your savings and get out of the process. The rest of those things won’t matter.
If you’re curious about our numbers, we automatically transfer about 10% of our earnings into taxable and retirement accounts each month.
⌛ Increase your time to market
The biggest advantage you have in investing is time – time in the market trumps everything else. If you have a long term horizon, it is almost impossible to lose. The longer you can invest in the market, the higher the likelihood of leaving a winner.
Despite comparisons between the stock market and gambling, it’s the complete opposite of a casino. The longer you stay in a casino, the more likely you are to leave a loser behind.
This is because the market is enjoying a lot of tailwinds. Inflation is zero at the gas pump and at the grocery store, but it’s priced in to stock market gains. If you buy shares of an index fund, like VTI or VOO, you get a large share of the market and can go to sleep knowing that over a long enough time horizon, you will gain.
Without getting too technical, here is the 5-year chart of the Vanguard Total Stock Market Index Fund ETF:
It had a bumpy ride but the thing grew 70% over 5 years.
Now watch it on the MAX, which dates back to June 1, 2001:
The point is, if you can wait long enough, you will win.
✈️ Take a view from 30,000′
Think back to the MAX chart for VTI – there’s been a lot of turmoil in the markets (and in life) since 2001. We’ve had a few massive market fluctuations.
Twenty of the Dow’s largest point changes (not percentage changes) all occurred in the above time frame. VTI is not the Dow but there is some overlap. If you look at the VTI chart, you can barely see them. And the market was already down in June 2001 – the dotcom bubble burst in 2000.
But when you take a view at 30,000′, it doesn’t look so bad.
The drop in 2000 (Covid-19) seems quite large, but it will happen with a global pandemic.
The last drop also seems quite unpleasant and maybe that’s why you’re hesitant. But take a look back at 2008, the financial crisis, and see how it’s just a bump in the road.
This too will be a bump in the road and as long as you keep investing you will come out ahead.
💸 You get a discount
When the market drops, consider it a discount.
This, of course, is easier said than done (or in this case, believed).
Look at it like this – imagine that the stock market, by magic, just went up a little each day. Pick two arbitrary points like I did:
If the market went up, you would feel awesome all the way up. But you would have done less money. Earning less money is not great. 😊
Because the market goes up and down, and you invest all the time at regular intervals, you actually got a discount (represented by yellow) between these two arbitrary points.
Sometimes the market goes down immediately after you contribute. Sometimes it goes right up. The key here is that over time it goes up and the dips are discounts.
This is, of course, a practical use of past data and picking two points, but we’re talking psychology here and what we need to do to keep our heads (and our money) in the game.
👀 Stop looking at the market
If you have a long-term horizon and the daily movements of the market do not impact you, because you have no intention of selling your investments, then stop looking at the market. Stopped.
During the Covid-19 pandemic, the constant barrage of pandemic news and information was having a negative impact on my outlook and mood. I had all the information I needed. We were confined until the vaccines were available. No news on outbreaks, transmission rates, mobile morgues, etc. was going to change this approach – it would only contribute to a sense of helplessness.
We had to manage a household with four small children, a virtual school, food, etc. If you were in a similar situation and haven’t blocked it yet, you know what it did. Watching the news wasn’t going to help.
What helped was blocking everything out, putting one foot in front of the other and getting the job done.
I take this approach to the stock market, especially in these times when things look lousy. Stop looking. If you have a long-term horizon, market movements don’t matter.
Go outside. 😂