FREE NEWSLETTER
BEING MECHANICAL and unemotional is a poor way to live life. But when investing, it just might make you richer.
Through this year’s stock market turbulence, I’ve been even keeled. My reaction to the plunging bond market has been more agitated, as I wrote about here and here. The fact is, while I’m convinced the stock market will rebound, I don’t have the same belief in bonds.
Armed with my faith in stocks, I’ve adopted a mechanical approach to investing, primarily using stock index funds. No more trying to outsmart the next guy. I don’t have to time everything exactly right or worry about where shares will bottom. I have an allocation target for stocks as a percent of my total portfolio, along with preset trigger points at which I intend to buy more during substantial market dips.
Pretty much all I need to know during a downdraft is, how far is the market from its peak?
Sure, I subscribe to The New York Times, Morningstar and even Barron’s. I take advantage of the office subscription to The Wall Street Journal. I’ve got a wicked FinTwit feed of great financial journalists and pundits. And, of course, I read HumbleDollar.
Still, as I make stock market decisions, it’s amazing all the things I don’t have to read. By avoiding overconsumption of financial news and advice, I keep my emotions in check and insulate myself from the temptation to put too much stock in predictions that seem persuasive in the moment.
I don’t need to know how long bear markets have lasted historically, or their average decline, though I’m grateful to those who produce such information. I also don’t need to know what the market expects from future Federal Reserve interest rate moves. I don’t even need to know whether inflation has peaked or whether market participants believe inflation has peaked.
For instance, on Aug. 2, I learned from my Twitter feed that Credit Suisse says “war is inflationary” and the federal funds rate is headed as high as 6%, while Bank of America says virtually the opposite, forecasting that 10-year bond yields are headed back down toward 2%. Both predictions potentially have big implications for stocks, but are pretty much worthless for making investment decisions.
What am I to do with suggestions that the dollar will supposedly soar inexorably, particularly against the yen, except perhaps wish I could afford another overseas trip? To change my approach on the proposition that the dollar will continue rising—for instance, by selling a Japan fund that I invested in last year—would be speculative. The good news: The fund is actually holding up relatively well in 2022.
I do admit to an interest in which market segments and asset classes appear inexpensive compared to others. One of the few market bets I’m making is on small-cap value stocks, where I have a modest tilt both in the U.S. and overseas, including in Japan.
But these days, I hunker down when the stock market is falling. I try to limit my intake of bad news—and there has been so much this year—so it’s easier to be patient and stay the course.
All I need is the aforementioned faith that company shares are almost certain to continue outpacing all other asset classes—as well as inflation—over the long term, as they have for centuries.
Having that conviction, I follow a pre-established plan to buy the dips at set thresholds as the market stair-steps down. Substantial correction? Put more in. Deeper slide? Buy. Bear market? Don’t sweat it. Trim one of my Treasury funds and buy again.
All of which I’ve done this year. Younger me would have been obsessed with buying at the very bottom. But such a pursuit is vain and exhausting—and success could only come from dumb luck. My more stoic approach to market swoons should prove rewarding enough in the long run.
William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
I agree. Live passionately, invest like a robot. I’ve used simple rules of thumb for allocation, dollar cost averaging and rebalancing and it’s been amazingly effective. Sometimes it’s hard to put money into an equity index when you ‘know’ it’s going to keep falling. And it’s hard to rebalance into bonds when you’re certain equities will continue going up. It’s also hard to shut out the financial noise, especially when you enjoy reading and listening to it as a matter of interest. Investing this way, though, has done very well over my 30+years of doing it and I’m glad I mostly followed my rules, although often in retrospect.