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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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As a fellow passive investor (who sometimes strays), I found this to be an extremely relatable article. At the same time helped me to look at it in a way I haven’t before. Thanks for writing it.
I’m with you. Timing not only takes time, but also requires assumptions and has a lousy record. But I do disagree with “have faith that tomorrow will be brighter.” Instead, I believe it is the days after tomorrow that are more important.
I appreciate this thought provoking article. My thoughts: first, if you keep a 60/40 equities/fixed income portfolio and rebalance every once in a while, then that 40% part should smooth things out somewhat when the bubble bursts (careful, of course, if that is all in bond indexes, as we learned in 2022). Second, if you actually own your primary residence (as opposed to having a title, a mortgage, and a lien), that should be an additional buffer. Finally, the rising tide of the economical metaphor might not lift all boats, but widespread catastrophes are more equal-opportunity and for all of us our time here is limited. So we make are best bets to hedge against outliving our means of support and enjoy this moment, which is the only one we truly have. For me passive index fund investing is still a major part of making my best best.
Jaimie, thank you for sharing your thoughts. You’ve given HumbleDollar readers much to think about. Here are some conclusions I drew from reading your article:
Regular dollar-cost averaging into a total market index fund may feel unwise at a time when the market seems euphoric. But the wisdom of an investment today doesn’t depend solely on share prices increasing indefinitely. As a passive investor, your future financial security also depends, perhaps to a greater extent, on the compound growth of your portfolio through reinvestment of dividends and the addition of new money. Personally, I wouldn’t regard such a mode of investing as a mindless ritual or “paying a tithe.” I would consider such activity to be disciplined.
If buying and holding a total market index fund is not justified when the market appears overvalued, what is the alternative? Reducing your stock holdings now only to reinvest later when the euphoria has subsided? That’s market timing and I think you’ll agree that it could be harmful. Charlie Munger was right: Don’t do anything to interrupt compounding.
Could today’s overvalued market be a blessing in disguise? If the current market euphoria is followed by a significant downturn, your continued regular investing will buy shares a lower prices. Buying low is when the real money is made in the stock market.
You mention that capitalists “crunch numbers, weigh options, calculate risks, consider time horizons and evaluate competition.” No doubt active money managers and individuals picking their own stocks do the same. But it is well known that active managers often trail their benchmarks. You don’t have to accept the efficient market hypothesis to justify passive investing.
Finally, I share your hope that we will avoid global conflagration from climate change, another world war, or some other catastrophe. But more than hope, I’m optimistic that technological advances will continue to promise us a brighter future. With that belief, I’m comfortable buying and holding total stock market index funds.
Thanks for unpacking a few of my generalizations and fleshing out some of the concepts touched upon in the essay. I agree with your point about discipline. Although, as someone pointed out further down in the comments, I think it is healthy to question one’s beliefs and behavior from time to time. Perhaps new information has been discovered that needs to be incorporated into my thinking, or maybe I have acquired new priorities that demand a fresh approach. We should always be asking questions. Life is dynamic and fluid and I am suspect of dogmatic attachment to a set of beliefs or practices. That said, passive investing using index funds works well for the reasons you point out above.
Keep writing! Great voice.
I appreciate the encouragement. Thank you.