Proud of Nothing

Dennis Friedman

I’M NOT SOMEONE who pats himself on the back when he does something right. I’m also not someone who takes compliments well. But this time, I want to toot my own horn.

After four years, I can finally say I’ve accomplished a goal that I’ve worked toward for many years, but was unable to achieve. It wasn’t easy. It took a lot of discipline and composure.

To accomplish this feat, I tuned out cable business news. I avoided financial articles on topics like why you should sell bonds or overweight foreign stocks. More important, I ignored the financial markets’ daily performance.

What have I done the past four years that I’m so proud of? Absolutely nothing. It’s quite an accomplishment, don’t you agree? It’s not easy to sit on your hands, sticking with your long-term investment plan through good times and bad.

Okay, I did do something. I rebalanced my investment portfolio twice. But that’s all. I give some credit to my financial advisor, who helped me stay the course.

You might say, what’s the big deal? Here’s what: I can, at long last, say I’m behaving like a passive investor. Yes, I owned index funds before. But that doesn’t make you a passive investor if you’re still chasing performance. This year, for instance, how many index-fund investors have upended their long-term asset allocation plan by reducing their bond holdings?

To be a passive investor, you have to hold your investments over the long term. I know four years isn’t a long time. But for me, it’s quite an accomplishment. What is passive investing?

  • Passive investing doesn’t try to outsmart the market, but rather endeavors to match the performance of the major market indices.
  • It’s a type of investing that seeks to minimize costs, including costs for trading and investment selection.
  • It usually delivers better after-tax results.
  • It slowly builds wealth over the long haul by using a buy-and-hold strategy. By contrast, traders and market-timers focus on short-run results.

I don’t know anyone who can forecast how stocks and bonds will perform over the short-term. But I do know that it’s highly likely the financial markets will produce positive returns over long periods. That’s why it’s important to focus on long-term rather than short-term results. It’s what a true passive investor does.

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