Testing My Faith

THOU SHALL NOT TIME the market. Thou shall not consider macroeconomic trends when allocating capital. Thou shall not listen to pundits on CNBC. Thou shall not engage in security analysis. Thou shall not dabble in options or individual stocks. Thou shall not shoot for the moon.

These are just some of the commandments sent down from on high to today’s index-fund investors.

As one of those investors, I assume that financial markets are more or less efficient, and that today’s stock and bond prices reflect all available public information. I’m convinced that a stock can be neither under- nor overvalued. The financial markets are vast and I am small, and neither tea leaves nor mountains of Morningstar charts can tell me with any scientific certainty where the market will reside tomorrow or five, 10, 15 or 20 years from now.

But to paraphrase Chinese novelist Liu Cixin, while the amount of matter in the universe is finite, life blossoms exponentially. This we do know. Our specific form of life—humanity—has grown to eight billion folks who rely on a global economy to provide the goods and services they need and desire.

As a passive index investor, I believe that the global economy as a whole will continue to expand in a two-steps-forward-one-step-back manner for at least the rest of my lifetime and that of my immediate heirs. Therefore, my wife and I hold about 50% of our net worth in a globally diversified, passively managed stock index portfolio that we believe will grow in lockstep with the global economy. We intend—but make no promises—to hold this position until the end of our days.

Such an approach, while considered a conservative allocation by many, still requires a faith that often appears to fly in the face of common sense, as most faiths often do. Out of this tension, doubt springs eternal. I often find myself questioning my commitment to the commandments of passive investing.

Suppose I currently believe we’re in an asset bubble built on “dumb money” and its fear of missing out. Valuations seem stretched, artificial intelligence hoopla is everywhere, stories of teenagers buying Teslas with gains from their custodial accounts pepper the financial blogs, insiders are selling, and the tech bros’ favorite Monopoly money—bitcoin—is hitting record highs. Many signs point to bubble-like behavior.

As a passive investor and disciple of the efficient market hypothesis, all I need do is sit back and enjoy the show. My personal opinion is irrelevant. Today’s share prices have been determined by a vast multitude of forces well beyond my power as an individual to control or predict. Perhaps Mr. Market is in the throes of “irrational exuberance” or perhaps his enthusiasm for future earnings will prove justified. Only time will tell. So, I sit tight and continue to dollar-cost average my household’s contributions to our nest egg into the same domestic and international total market funds that we have been buying into for years.

Yet, I can’t help but wonder, “Am I allocating capital or paying a tithe?”

Capitalists allocate capital in an effort to produce profits. They crunch numbers, weigh options, calculate risks, consider time horizons and evaluate competition. In other words, they reason. They analyze empirical data before they make a decision to invest a dollar.

By contrast, parishioners who pay a tithe are performing a ritual rooted in faith. They don’t evaluate their tithe’s return on equity or measure its current earnings yield. Such metrics don’t apply to acts of faith. Our parishioners never consider how many of their prayers were answered last month versus this month, or whether they should adjust this month’s tithe based on the results of such calculations.

Like passive investors, faithful parishioners continue to contribute to their cause month after month, year after year, without regard for day-to-day concerns. Such concerns, both passive investors and parishioners point out, are transient and easily vanquished in the long run.

I am not a religious person. I do not consider myself a person of faith. I believe in things that can be quantified, proven, recreated. I believe in the science behind vaccines and not in the magic of essential snake oils. I believe that the earth is round, revolves around the sun, and that eight billion people stick to its surface due to gravity. I believe that someone offering to sell me ocean-front property in Idaho is a liar, and should be tarred and feathered by regulators. In short, I believe in facts and the truths they tell.

My belief in facts and empirical analysis leads me on occasion to question my practice of passive investing, where I buy and hold a total market index without regard to today’s underlying fundamentals. Indeed, when I say it out loud, the strategy seems nuts—almost cult-like. Am I in a trance? Have I been brainwashed? Indoctrinated by an algorithm? Drugged? How to explain my apparent mindless and ritualized investing behavior? How did I come to adopt an investing style that strips me of agency, autonomy and self-determination?

Sometimes, I think it is the math of buy-and-hold passive investing that sustains my faith. But even the math is based on historical precedent—meaning past performance. And, as every investor knows, past performance is no guarantee of future results.

While I believe that the math of passive investing trumps crystal balls, tea cup chart patterns, “you only live once” momentum plays, my gut, somebody else’s forecasts and any other form of stock market divination devised, such belief is predicated upon a hope. It is a hope that humanity will continue to grow and to evolve and not, instead, be swept into a new Dark Ages by war, environmental catastrophe and rising inequality. As a buy-and-hold passive investor, I must have faith that tomorrow will be brighter and that, in the long run, everything will turn out fine.

Forgive me if I have my doubts.

Jamie Seckington grew up on the beaches of Southern California listening to punk rock and raging against the machine. Decades later, he now lives a quiet life in north Idaho and reads HumbleDollar regularly. He has learned to appreciate the many ironies that life offers.

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