When you’re investing for the long term, the most destructive thing you can do is to try to time the market by buying and selling.
First, people simply aren’t good at it. They tend to buy high, when every cable news channel is trumpeting record high stock prices. Then they sell low, or stop investing, when investments are crashing and the same news channels are predicting an end to the economy as we know it. Consider these two facts: the market has accumulated wealth relentlessly over the past hundred years, and most people have still lost money investing. People just can’t help themselves.
Second, all of that selling and buying creates friction: there are trading costs, and taxes to pay. And between trades, that money is on the sidelines earning zero return. This is often overlooked, but it’s a huge, if secret, drag on performance.
So I’m always looking for new ways to convince people to simply set their asset allocation, invest their money, and leave it alone. Here are seven ways to trick yourself into doing just that.
1. Pretend you’re not buying stocks
When your favorite cereal is half price at the supermarket you’re liable to buy three boxes instead of one. But what about when stocks are half price? Many people panic and try to sell their stocks, or at least stop buying. Don’t. If you’re investing for the long term, think about your investments more like cereal. Low prices should mean buying extra shares, not trying to unload it at a discount.
2. Don’t think about the price. Think about the amount
There are two ways to think about your total investment portfolio: as an amount of money, or a number of shares. As you get closer to retirement, the dollar amount of your investments absolutely matters. But in your early years, it makes more sense to count the number of shares you own. This number will only grow as you invest, regardless of the price of the underlying shares. Focusing on share numbers, you’re more likely to filter out the noise of short-term market swings and stop yourself from selling; after all, you don’t want your share count to decrease.
3. Dump all your money into retirement accounts
Your retirement accounts are like minimum-security prisons. They may not hold your money with an Alcatraz-like grip, but they put safeguards in place to keep your money invested. Pulling money out or retirement accounts early can lead to a penalty: your original taxes owed plus a 10% penalty. And you can borrow your money from yourself, but only to buy a home or deal with a hardship, and even then you have to pay yourself back. Your taxable brokerage account, however, is an open field: you can liquidate your accounts and pull the money out in minutes, making them susceptible to your emotional trading. To trick yourself into not selling, max out your retirement accounts to the largest extent possible. And with the 401(k) limit at $18,000 and the IRA limit at $5,500, there’s plenty of room to invest in tax-advantaged accounts.
4. Pretend your taxable account is a retirement account
When you log into your brokerage account, pretend that the sell button is greyed out. Unless an emergency requires you to sell your investments, treat your taxable accounts as one-way streets: money goes in, but doesn’t leave. Selling investments for normal expenses doesn’t make sense anyway: you could lose money and you’ll definitely incur trading fees. Short-term money shouldn’t be in the stock market; a high yield savings account makes more sense for expenses less than five years down the road.
5. Worry about ten-year performance only
It’s easy to be freaked out by stock market fluctuations. After all, world events can seem abstract on television, but when they affect your portfolio suddenly they become very real. It can be scary to realize that events outside your control, outside of your own country even, can affect your nest egg. But often these dips are short-term events. Zoom out to ten-year periods and the view looks a lot rosier. For example, here are the worst ten year periods for portfolios holding 50% stocks and 50% bonds:
For this asset mix, no one has lost money over a ten-year period if they left their money alone. Even in the worst years, from 1928-1938, an investor would have turned $100 into almost $130. Next time you log into your investment dashboard and see lower numbers than you’d like, ask, “What is my ten-year performance?” You should be able to easily call these up on most investment websites. Unless even those numbers look grim, leave your investments alone.
6. Calculate your Spending vs. Savings Rate
Sometimes I think people forget that they’re saving this money to eventually spend it some day. That means that understanding spending is just as important as managing investments. Calculating your spending versus saving rate can be difficult, but it’ll help you understand just how much money you’ll need to retire.
A person who invests ten percent of their income and spends ninety percent is saving a year’s worth of expenses every nine years. A person who invests twenty percent of their income is saving that much every four years. That’s a big difference. And if you’re a mutant super-saver who puts away fifty percent of your income, you’re buying a year of freedom every single year. This hides some complexity: your investments should increase in value, and your expenses could decrease in retirement. But it’s a good rule of thumb to know how much freedom you’re buying. And changing this ratio, either through decreased spending or increased investment, is much more in the average person’s circle of control than getting rich through investing prowess.
7. If you’re feeling the itch to sell, look at historical charts
When investments shed 5-15% of their value, some investors feel the urge to clear out and run. Though these prices can feel like they’re living in lowest valley on earth, they’re often, in the long term, just a short dip on their way to a new high. To get a better sense of the big picture, consider a chart like this, from Google Finance:This is the S&P 500. For even more history, check out this Dow chart from MacroTrends:
Will the future exactly match the past? Of course not. But it’s hard to look at these charts and have anything other than a positive long-term view of the stock market. And keep in mind this chart doesn’t account for reinvested dividends, which can help sweeten even periods of flat growth. Whenever my investor’s adrenaline is telling me to sell something, buy something exotic, or otherwise muck with my system, I look at charts like these. More often than not, I end up doing the same thing: absolutely nothing.
The best way to put together an investment portfolio is through methodical, rational decision-making, either alone or with a financial advisor. Once you’ve put your plan into action, it mostly works unattended, with an adjustment here or a rebalancing there. Buying and selling investments based on feelings of fear or hubris are fundamentally irrational. They come from an older, reptilian part of the brain, and it can only hurt your long-term plans to choose the reptile over the rational. It’s worth being rational, even if you have to trick yourself.