Why We Ignore The Stock Market And You Should Too: Demystifying Personal Finance Part 4
Apparently the stock market is doing terrible things right now. But I don’t care. Monitoring the market like Frugal Hound stalks squirrels is a patently useless waste of time, energy, and brain capacity (same for FH as she’s tethered to a leash and, uh, the squirrels are decidedly not). There’s simply nothing to gain by it.
So while the rest of the world frets over the machinations of the market, I’m taking a different tack. I’m not going to tell you how to optimize your investments or beat the market or pick that one hot fund… why not? Because I don’t know how to and neither does anyone else. No one can predict what the market will do and there’s no secret formula for beating it.
What You Can Do
There are, however, two surefire ways to beef up your investment portfolio: 1) increase your savings and, 2) increase your earnings. I realize this is ridiculously less sexy than playing day trader on your phone in your cubicle, but, these are the only things that are 100% guaranteed to work.
My approach to all things in life is to control what I can and to categorically ignore/let go of the things I can’t.
Let’s be clear here, I’m not always successful at this, it’s merely what I aspire to do. The stock market is firmly in the camp of things I can’t control and so, I pay it no heed. No heed at all. I used to spend momentous amounts of time and effort trying to alter the course of events beyond my control, which worked a whopping 0% of the time.
But in the genre of things you can impact… If you increase your rate of savings–say, through some hardcore frugal action–then you’ll have more money to invest. And if you increase your income, then you’ll have more money to save. These, my friends, are the variables that you absolutely can control. Dips in the market, conversely, are entirely beyond our purview. Since investing is a scenario in which your gains are only as substantial as your inputs, focus your energy on increasing your inputs.
While it might not sound thrilling to save extra dough just to plough it into the market, consider for a moment our dear old friend compounding interest. Frugal Hound the Magical Compounding Interest Unicorn is back again to remind us all of her awesome non-squirrel-catching-related powers. Compound interest is interest added to the principal such that your interest earns interest. This is a sweet, sweet thing. Very simply, it’s the function of money begetting more money. The more money you have invested and the longer it’s invested for, the more money you’ll make from your investments. Here’s an incredibly impressive math equation for ya: money + time invested = more money. We’ve established I’m horrific at math, right? But even I can understand this one.
Wondering where to start with setting aside more funds for your very own magical unicorn of compounding interest? Start by tracking your monthly spending and identifying where you can make cuts (I bet you a dollar you’ll be able to find something you can frugalize further). Mr. FW and I use Personal Capital for this task, which has the superb advantage of being both free and easy to use (you can sign up here if you’re so inclined).
Can’t Touch This Stock! (aka stay invested)
This is another variable that you have almighty control over: the duration of your investments. The longer you stay in the market, the better off you’ll be. Pulling in and out of the market when you feel the slightest twinge of panic is a great way to ensure you’ll never make any money from your investments. Money has no emotion, it doesn’t care if the market’s up or down–don’t impose your human sentiments on it. Instead, trust in the long range benefits of market returns.
Mr. FW and I bought our first stocks in 2008 as everyone else was fleeing the scene and we’ve let them ride ever since. Additionally, a portion of every single one of our paychecks goes automatically into our investments. One of the keys to maintaining your sanity in the market is to invest regularly and stay invested.
You’ll drive yourself nuts if you try to pick the perfect moment to start investing–much like brushing your teeth every day, it’s something you should do regularly and without fear or drama (unless you have some sort of bizarrely dramatic oral hygiene routine). In order to reap those glorious unicorn benefits of compounding interest, you’ve got to have the time component of the equation on your side (remember: money + time invested = more money!)
Investing is a longterm proposition–it’s not something to track or speculate about on a daily, or even yearly, basis. Mr. Frugalwoods and I consider our investments to be part of our very long range plans and have no intention of withdrawing them anytime soon.
Note that this longterm approach is why you don’t want to have your emergency fund invested. It’s important to have that reserve of cash on hand in the event of an unforeseen demand on your funds. So while you want to funnel as much as you can into your investments, don’t put every last cent in there. Conventional wisdom advises keeping at least three to six months worth of living expenses in cash (I lean towards six months because I’m a bit conservative, but many folks feel good with three months worth).
How Do We Invest?
In case you now have the burning question of how Mr. FW and I invest, here’s our quick (and easy/boring) rundown. We have two portfolios of stocks: our taxable investment account and our 401Ks. Our taxable account is invested fully in the low-fee total market index fund (FSTVX). Our overall portfolio is weighted 90% total market index fund and 10% bonds, with the bonds being held in our 401Ks in order to maximize tax efficiency.
Both of our 401Ks are in low-fee index funds as we’re staunch believers in avoiding fees whenever and wherever possible. Once a year, we spend 5 minutes rebalancing our portfolio to match our desired asset allocations. The most important aspect of managing stocks is to choose low-fee index funds, and then resist the urge to tweak, tinker, or otherwise do anything with them, other than shovel in more money.
And herein exists a fourth variable over which you can exercise your all-encompassing power: choose funds with low fees. This simple decision will save you epic amounts of cash over your investing lifetime.
The Zen Art Of Losing Money
Is my portfolio down right now? Oh most definitely. But I have enough other stuff to worry about in life (i.e. will baby spit-up permanently stain our hardwood floors, because it’s kind of looking like that right now… ). What the market is/is not doing doesn’t rise to a level that causes me even mild heartburn.
While some folks love/hate watching the market, I find that I prefer to ignore it entirely. Paying attention to it isn’t going to make things better or easier. It’s not going to increase the amount of money in my account and I tend to think it would be bad for my health (you know, stress and all that). You’d be much better off focusing your energies on reducing your grocery budget–now that’s a vastly more achievable, tangible goal that’ll yield actual benefits.
Consternating over the stock market is akin to divining what goes on in Frugal Hound’s brain–it’s a futile endeavor sure to leave you flummoxed and bereft. Turn your attention instead to more productive endeavors (like helping me figure out how to remove baby spit-up from, well, everything… ).