I was reading the White Coat investor’s blog the other day and he had written something that was very profound and it was a good gauge to test what level of investor you are. Here is the quote below
“I have often said that beginning investors have trouble following their plan at market lows, intermediate investors have trouble following their plan at market highs, and experienced investors follow their plan all the time. But that doesn’t mean that those experienced investors like the way it feels to be at market lows or at market highs.”
This is a great litmus test to try on yourself. I did it and realized that I am an intermediate investor and I had to automate my investing in order to get myself out of the way of the investing process. The reason being is because it’s fear that leads to difficulties following your investment plan at market lows and highs. At market lows it’s fear that the stock market will fall lower. When we are at market highs again it’s fear that we are in a bubble and paying too much and that the bubble will pop and the price drop as soon as we buy it, but we have to have a long term perspective, especially if you’re invested in a total stock market index fund.
The price of a low cost broadly diversified index fund will be much higher in ten years and even higher in 20 years. You are buying a highly valued asset and the price you buy it at doesn’t matter. The reason this is the case is because over time value trumps price. An appreciating asset that consistently beats inflation with no chance of bankruptcy or default is the value. You have guaranteed growth and preservation of capital. It’s a win win proposition. What’s there to fear. If you buy and have a net loss after one year of holding then continue to hold. If the same is true after 5 years then do the same, hold. If it’s the same after 10 years hold. After 15 years, you are guaranteed to have a net positive return. Why is that. It’s because that’s the longest bear market that has ever existed. Now this time it is different because every bear market is different. The next one may be longer than 15 years but it will end and you will come out on top if you hold.
At the end of the day passive investing takes faith. What, you may ask, is the opposite of faith. Well that would be fear. Fear is what will keep you from becoming an experienced and successful investor and it’s opposition, faith, is what will allow you to grow as an investor; but it’s the experience that is the most difficult to obtain. I will discuss why that is in my next post.