Go Long
Dennis Friedman | Oct 14, 2020
WHEN I WAS GROWING up, I don’t remember my parents talking about the stock market. In fact, I’m not sure when they started buying stocks. It could have been sometime after I graduated from high school in 1969.
When I was a junior in high school, however, I do remember a conversation about stocks between two of my classmates. Brandon was telling Brian that he could buy a motorcycle if he sold some of his shares.
I wasn’t surprised that Brandon owned stocks at the young age of 17. Both Brandon and Brian lived in Ladera Heights, California. It was a wealthy community back then and it still is today, with residents that include celebrities and highly paid sports figures. Some of my classmates from the area drove new Chevrolet Camaros, Plymouth Roadrunners and Ford Mustangs to school.
I never envied the Ladera Heights kids until many years later, when I wondered what happened to Brandon’s stocks. Did he still own them? Did he sell? Were they blue chip companies that are still trading on the stock exchange?
If he held on, just think how much those stocks might be worth today. All that compounding over many decades. At age 17, Brandon was sitting on a potential goldmine. But I suspect he sold long ago, displaying the sort of short-term focus that often hurts stock market investors.
Want to be more tenacious? Here are seven recommendations:
- Invest in a target-date fund. You’ll have fewer decisions to make, and that’ll encourage a more hands-off approach to investing that can lead to better performance. According to BlackRock, target funds “may also soften the downside of tough markets—especially as retirement appears on the horizon.” The funds offer a diversified investment portfolio in a single mutual fund, with a stock-bond mix that grows more conservative as you approach retirement. The funds also continuously rebalance their asset mix—something investors often fail to do on their own.
- Favor mutual funds over exchange-traded funds (ETFs). Yes, ETFs often have lower annual costs than index mutual funds. But they encourage frequent trading because their shares can be bought and sold whenever the stock market is open, while you can only trade a mutual fund once a day, as of the 4 p.m. ET market close. The legendary John Bogle once noted that turnover in the shares of SPDR S&P 500 ETF was 5,000% a year. “Is there anything the matter with that?” he pointedly asked.
- Don’t invest in individual stocks. Prices of individual stocks can be highly volatile, making it harder to stay the course. Instead, invest in a target-date fund or a balanced fund, where share-price movements are less unnerving.
- Turn off CNBC. Watching cable financial news can give you a short-term perspective on the stock market. The fixation on the minute-by-minute movement of share prices and interest rates, coupled with the commentary from financial pundits, can make your head spin.
- Don’t listen to friends and family. Early in the 2000-02 bear market, I advised my sister to buy the dip, something I’ve long regretted, because it meant she bought at the beginning of a long ruthless downward spiral in stock prices. Where did I get that not-so-wonderful piece of advice? From an investment newsletter that I subscribed to at the time.
- Don’t look at your investment portfolio. To be a tenacious investor, you need to take a long-term view of the stock market. Looking at the daily fluctuations in your portfolio’s value almost inevitably leads to emotional decisions.
- If all else fails, get help from a low-cost financial advisor. Why pay for advice when you know how to manage your own money? What you know isn’t the only thing that matters. Instead, when it comes to investing, what also matters is how you behave. That’s one of the main reasons many investors underperform the market averages. With any luck, a good financial advisor will keep you from making costly behavioral mistakes—and, if you avoid those mistakes, the advisor’s fee could be money well spent.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. His previous articles include The Short Game, It Sure Adds Up and 11 Remodeling Tips. Follow Dennis on Twitter .
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Good advice. The main issue I have with target date funds is that age is almost always the only factor that determines investment mix.
Regarding advice to/from family, I have spoken up when asked about buying a variable annuity and also told my sister she would be better off to dump her expensive advisor and invest in a broad low cost index fund.
I can’t stand CNBC but I think such outlets are fine as long as one doesn’t allow them to affect their investment decisions. As an analogy, many of us enjoy watching political news even though it almost never affects our voting decisions.
I think the second to last point is an often under-appreciated piece of advice. DON’T LOOK! I am a compulsive looker… I admit it. I check stock prices a few times a day. Even if I don’t do anything, I still have to look. Like passing an accident on the freeway, or a pretty girl, I just have to look. A dear friend who turned me on to index investing a few years ago says he only looks once a year, for about 30 min to rebalance his portfolio. I spoke to him in April during Covid.. “Ben, how much are you down?” I have no idea was his response. I don’t plan to look until the end of December. Damn, was I pea green with envy. To be able to just not look. Out of sight, out of mind. I wish.
I am a big fan of turning off CNBC. If there is a good interview there can always watch it later. Long term investors not well served by panic and greed.
Good interesting read, my parents did not invest in the stock market as they felt stocks were way to volatile. The knowledge of mutual funds was quite sparse in the 50-60s.
My Dad worked for Sears and he did have a generous profit sharing plans for many years. Fortunately for him it worked out ok, they retired comfortably and modestly in the 70s. He had all his eggs in one basket, for those who retired a few years later the landscape of Sears had fallen tremendously.
My first real career job in 1982 was with a large Pharmaceutical company. My manager sat down with me to complete what seem to be an overwhelming amount of paper work. He enrolled me in the 401k plan at 15% (the maximum), explained to me me about the matching funds which would be in company stock. He then pulled out of his brief case enrollment form for a mutual fund family. He explained this would be where I augmented my company retirement fund. He made it sound like all this was standard practice as he showed me where to sign.
He started me on a disciplined financial path to a comfortable retirement. I thank God everyday for putting this man in my life.
You should build a shrine to him… or something! What a great story.
“Favor mutual funds over exchange-traded funds (ETFs).”
In taxable accounts aren’t capital gains deferred until the shares of the mutual funds are sold which is not the case for the shares in ETFs?
Both mutual funds and ETFs can make capital gains distributions, though ETF distributions will tend to be somewhat smaller. Meanwhile, in terms of unrealized capital gains, those aren’t realized until an investor opts to sell, and that’s true whether it’s a mutual fund or an ETF. You can learn more here — and what’s described applies to both mutual funds and ETFs:
https://humbledollar.com/money-guide/mutual-fund-taxation/