My Path Part 2: The Path of Least Resistance

Fast forward a few months from when I moved back home and started my first job…  I’m saving as much money as I can to build up my emergency fund and start investing.  I began to start reading on how to invest. I came across stock picking as well as index funds.  I knew nothing about investing, but I’d heard my parents and grandpa talk about stock picking in the past.  I assumed that was the path to go down, so I did a bit of reading, and then put a few thousand dollars into some individual stocks.  I lost money with penny stocks almost immediately and over the past year, the $3,000 I put in at one point was up over 25% and is now down about 10%.  However, this small sum of money was the only money I’ve put in individual stocks. Since then I’ve began investing in index funds because I quickly realized that it takes an immense amount of research and discipline to pick stocks (which I was not particularly interested in doing) and according to many studies I read (as well as a plethora of posts and comments on /r/personalfinance and /r/financialindependence), you’re much more likely to underperform the market with this strategy.  I then swapped my thinking, and all my future dollars have been invested in well diversified index funds that track the whole world market.

I’m heavily in favor of keeping things as simple as possible.  I eat the same thing for breakfast pretty much every day, I workout at the same time nearly everyday, I don’t have an expansive wardrobe so I don’t have to put any effort into what I want to wear any given day.  These might not be the best examples, but my point is I’m the type of person to take the path of least resistance unless I have a very good reason not to. For example, to stay in shape I could do an easy bike ride everyday and enjoy myself.  However, I want to be competitive in races so sometimes I have to do incredibly hard workouts and put myself in a bunch of pain to reach my goals. To me, the want to be competitive is a good enough reason to do more than the minimum when it comes to cycling.  Applying this same logic to investing, if I could put in a couple hours of research per week and make 20% returns year over year consistently from picking stocks without any added risk to indexing, I would absolutely do this. However, the research shows this is not the case.  There was an article talking about Fidelity’s findings on who were the best investors they had. The answer was that the best investors were those who were dead and invested in low cost index funds. These individuals, because they were dead, had no emotions and could not react to the volatility of the market and sell when they were nervous.  Since index funds follow the whole market, we can then say that other investors who were picking individual stocks did not beat the market. So in the case of investing, the path of least resistance is also the highest expected rate of return. That’s perfect for me! Another thing to not worry about. After that, all I had to do was choose an allocation that works for me and consistently contribute to investment accounts.

I always try to make as things as simple as possible so that I can spend more times doing things I enjoy.  There will surely be people who do beat the market over the course of their investing career with a combo of skill and luck.  I also believe I am not one of these people. It makes a lot more sense for me to track the market and ride its ups and downs rather than making my own ups and downs from good and bad choices.  I’d much rather the market fluctuations be what is out of my control rather than bumming myself out from poor choices and getting adrenaline boosts from good ones. If it’s out of my control, it’s something I don’t need to put excess energy into, or get too emotionally invested in.  Especially because I believe that in the long run, that line is just going to keep going exponentially higher. And it’s a plus that for investing, the hands-off approach also happens to lead to the highest expected results. Don’t you just love when the simplest solution also leads to the best expected results?  It’s even better knowing how important investing is to do and how being smart with it will allow me to retire early if I so choose!

 

What’s your investing strategy?  Are you 100% passively index funds or do you allocation a portion this to more risky strategies like option trading?

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