On Tuesday, Sam over at Financial Samurai wrote a really interesting article on why he dislikes investing in the stock market. You can check it out for yourself here: Why I Dislike Investing In The Stock Market Even In Good Times.
This was a fascinating post to me on several levels. At its core, it is an extremely articulate and comprehensive summary of why trying to pick individual stocks or time the market are not good decisions for most investors. Among his reasons are:
- The markets can stay irrational longer than you can stay solvent. In other words, trying to time the market will lead you to the poor-house.
- No matter how much research you do, there is always someone who has more information and can make a more informed decision.
- We are all subject to emotions and these emotions cause us to make bad decisions.
- Random stock picks often outperform someone putting in massive time and effort to research and pick out the “best” stocks.
- Investing always feels easy when times are good. Most people aren’t truly prepared for when the markets go south.
All of these arguments are spot on. What’s fascinating to me is the conclusion that’s drawn from them. Essentially the conclusion is that while stock-picking and market timing is time-consuming, frustrating, difficult and likely to underperform, we all have to do it so you might as well put the time in anyways and just deal with all of the negatives.
I fully agree with all of Sam’s points about stock-picking and market timing. It is time-consuming, emotionally-draining, extremely difficult, and very unlikely to compensate you for the amount of effort you put in. One of the commenters said that he had yet to get into investing because it felt like gambling to him, and after reading this article I can only imagine those feelings were reinforced.
But here’s the thing. This article assumes that the only way to invest is by picking stocks and market timing. I would agree that for most people, those strategies are a lot like gambling. But there is an alternative that is completely ignored here. It’s an alternative that is simple, low-cost, doesn’t require much time investment, and has shown to consistently beat other strategies year after year.
Index fund investing, which is essentially just investing in the entire market, is not much like gambling at all. There are of course no guarantees and the markets will move up and down, but over time the stock market as a whole has shown to produce very positive returns, in the range from 8-10% per year. This is very different from gambling, which has a negative expected return. It’s also very different from the strategies that appear to frustrate Sam so much, because it doesn’t require you to follow daily market movements, move in and out of different stocks, or even really battle emotions. You come up a plan, implement it, check in every once in a while to make sure things are on track, and spend the rest of your time enjoying life knowing that you’re going to do better than 90% of the people out there.
Investing in the stock market can be as simple or as complicated as you want it to be. But higher returns do not follow increased complication. The only things that complexity brings to your life are decreased time for other activities and increased effort, anxiety and frustration. Sam’s article outlines all of the reasons for that better than I can. I just reach a different conclusion about what it means.
Other articles I think you’ll like
CNN: Some interesting thoughts on how to spend your money on happiness.
Johnny Moneyseed: Smart take on why you should have an emergency fund even while you’re paying off debt, with some good simple tips about how to get started.
Mr. Money Mustache: A contrarian view of retirement planning, with an entertaining diatribe against the financial advisory industry.
The College Investor: A smart take from John at Frugal Rules on why timing the stock market doesn’t work, and why you shouldn’t be scared to get in.
Eyes on the Dollar: Bad habits can cost us money every single day. How can you fight this?
Broke Millennial: An awesome introduction to the “magic” of a 401k.