Clocks & Calendars
Our grandparents faced a much simpler task relating to financial planning and retirement than we deal with today. There was a time when, if you got a good job, your retirement was taken care of through a vehicle known as a pension. For generations, when workers finished their career, they could comfortably retire knowing that they would receive a monthly pension check for the rest of their lives.
We live in a far different world today. If you and I are going to succeed financially and retire in comfort, we are going to have to chart our own course and steer our own ship. This will inevitably involve you investing some of your hard-earned dollars in the stock market. The mere thought of investing in the stock market strikes fear in the hearts of many people. They conjure up images of casinos or lines of hungry people outside of soup kitchens during the Great Depression.
I have long believed that facts are the best way to overcome fear. A brief historical look at the Dow Jones Industrial Average—which is the main barometer of how the stock market is performing—shows us that the stock market began the 20th century at 66 and began the 21st century at 11,400. When repeating those statistics, Warren Buffett said, “How do you not make money in a market like that?”
The answer is quite simple. The average individual investor loses money in the stock market because they move in and out of the market at the wrong times. If you invest based on emotion, fear will cause you to get out of the market when it is low, and greed will cause you to jump into the market when it is high. Anyone who knows anything about the stock market has heard the sensible advice to “buy low and sell high.” But emotional investing causes the average individual investor to do the opposite.
For this reason, I’m a fan of index funds and managed mutual funds with long, successful track records. These are investments that you can buy and hold over a long period of time. If you look at the stock market on a daily basis, it appears to be a chaotic roller coaster, but if you look at it over your potential working lifetime, it is relatively safe and predictable.
Imagine a young child walking up a set of stairs while playing with a yo-yo. If you focus on the yo-yo, it’s impossible to get a sense of direction, but if you focus on the child, it is clear that they are moving upward. Predicting local weather on a daily basis is a difficult undertaking which is why weather forecasts are often frustrating. But if you live in the northern hemisphere, I can tell you with a high degree of certainty that it will be colder in January than July. But if you want me to tell you what the weather will be on a specific day in July, I am clueless and your local weatherman is not in much better shape.
Before every football game, they flip a coin to determine which team will kick off and which team will receive. If you look at an individual game, it is impossible to predict who will win the coin toss. But if you look at an entire season or, better yet, a decade, we know what the average outcome will be.
We can all succeed financially and live much better than our grandparents did on their pensions if we will ignore the short-term numbers and trust the long term trends.
As you go through your day today, evaluate your investments using a calendar not a clock.
Today’s the day!