With terms like “Bonds,” “Options,” or “Mutual Funds,” investing can look rather intimidating at first to interested onlookers. Fortunately, it doesn’t have to be.
What you might have seen in movies of intense action filled with shouts of “Sell, sell, sell!” and “Buy, buy, buy!” as stocks are traded in the New York Stock Exchange (NYSE) real-life investing for the average person doesn’t have to be so hectic, either.
According to Bogles’ Little Book of Common Sense Investing, the average individual shouldn’t concern themselves with such an active portfolio. Instead, all they should concern themselves with is focusing on finding an index fund that suits them, investing their money into it, and then (as counter-intuitive as it sounds) just forget about it.
So Why Passive Investing?
Investors who champion the active approach will often tout that they can “beat the market” through analyzing past performance or through other means. However, more often than not, this is nothing more than a pipe dream.
There is no reliable way of predicting the stock market, and constantly buying and selling the hottest trends in pursuit of doing so will likely end up costing you more money than it is worth. As John C. Bogle says, “Unlike the hot funds of the day, the index fund can be held through thick and thin for an investment lifetime, and emotions need never enter the equation.”
Therefore, the solution, as stated before, is simple: invest in an index fund, like the S&P 500, and then just leave your money alone. Do your best to keep your eyes off of the current trends and the ups and downs of the market. Things might look bad at times, but selling when prices are lower than when you bought is a rather poor decision.
That may sound obvious, but many active investors tend to let their emotions take control when there is a dip, causing them to sell shares to prevent themselves from losing even more money. As Warren Buffet says in John C. Bogle’s The Little Book of Common Sense Investing, though, remember the 4 E’s: “The greatest Enemies of the Equity investor are Expenses and Emotions”.
“But what if the stock market crashes and I lose my money? Wouldn’t I want to sell and look for something better?” you may be asking.
Don’t worry; with every large dip in the market, index funds have always experienced an equal or surpassing resurgence in time. What is important is that you stick to your guns and not sell during that dip like a more active investor might. Even if it lasts several months or years, prices will eventually rebound and you will be all the better for holding your ground. Consider the DJIA over the past 5 years, there are periods of significant volatility, but if you’re a long-term investor there was an attractive point to point gain.
Remember- sell high, buy low. Even Charles Schwab reiterates the importance of passive investing:
“It’s fun to play around… it’s human nature to try to select the right horse… (But) for the average person, I’m more of an indexer… the predictability is so high… for 10, 15, 20 years you’ll be in the 85thpercentile of performance.”
In other words, if you have enough extra cash to try predicting the market, go right ahead. However, consider also placing your money in an index fund to diversify your portfolio for greater peace of mind and stability in the long run.
Bogle, J. C. (2017). The little book of common sense investing: The only way to guarantee your fair share of market returns. Hoboken (New Jersey): Wiley & Sons.