Investing can – and should – be simple!
I am into reading and learning about investing, and obviously you, my reader, is to, otherwise you wouldn’t have found this blog. And while it is fun to talk about how different investing strategies do, and what the ‘best one’ out there is, it is important to not loose sight of the basics. We tend to get caught up in minor details. Of course, when people talk about money, most want to get the highest possible return.
But peace of mind is also worth a lot.
After all, for many people, more money is the same as peace of mind, because it means they don’t need to worry about losing a job, paying their bills or defaulting on their loans.
I personally think that in many cases, leading a fulfilled life is not about having the largest possible personal net worth, although money certainly makes many things easier. It is also about simplicity, and not spending an entire life worrying about trivial things.
I have already said in a previous post that I prefer to only check up on my portfolio once per month, because looking at it once per month gives me all the information I need to adapt my approach, while not making me anxious every day when my portfolio drops 2%, just to rebound 2% the next day. Worrying about investments on a day-to-day basis is insane, even if the Internet and fancy smartphone apps allow us to do so and constantly check how our portfolio is doing.
Just because we can doesn’t mean we should.
A simple analogy is your health and blood levels. There are periods in our lives, for example when we’re sick, where we are rightfully worried about our health, and regular tests are important. But for the vast majority of our lives, it would not make sense to look at our blood levels on a quarterly, monthly or weekly basis, because we would obsess over small, insignificant changes. This would not be good for our health. Similarly, obsessing over your investment returns every day is also not a good thing.
Behold the beautiful simplicity of a 60/40 buy-and-hold stock / bond portfolio
Below is a chart showing what your performance would have been if you had invested in a very simple 2-fund portfolio that bought the Vanguard Total Stock Market fund (60%) and the Vanguard Total Bond Market Fund (40%) in January 2000. No rebalancing. No worrying. No choosing investments or strategies. No nothing. And the result is better than the S&P 500!
Have a look at the little peaks and valleys I highlighted. Could you have obsessed over those, asking yourself every day / week / month why the market dropped? Of course you could have. Should you have? No, because this long-term chart shows us that the market has really been constantly rising, with minor hiccups along the way. And the constant rise is to be expected. The world economy is still growing, and this growth means that people all around the world work and buy and consume stuff, and they do so more and more year after year. And the dividends and price gains that stocks and bonds experience as a result are your personal way of participating in this development.
In the end, as long as you consider some basic principles like diversification in your portfolio, it doesn’t really matter whether you get 6% or 7% per year, or 12 or 12.5. What matters is that you participate in the development of the world. And that you don’t worry too much while doing so.
As long as you expect humanity to continue coming up with valuable new goods & services, economic growth will continue. Personally, I don’t think that will stop anytime soon let alone during my lifetime.
So I’m confidently investing, and you should be, too.