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AS THE SAYING GOES, “Never ask a barber if it’s time for a haircut.”
This isn’t to suggest that barbers lack integrity. Rather, the point is that—when faced with a question with no definitive answer—business people often offer an answer that reflects their own best interest. For a barber, it’s always a good time for a haircut. The barber is neither wrong nor correct. It’s a judgment call. But the barber is undoubtedly invested in his opinion, and he stands to gain should the questioner act on his advice.
Unlike a trustee, a barber has no fiduciary duty to his customers. He isn’t required to follow an established “standard of care” like a medical doctor treating a patient. The barber is free to give advice that serves his self-interest.
As you may have noticed, the internet is overflowing with folks eager to give advice. There’s a how-to blog, YouTube video, TikTok song and dance, and podcast on everything under the sun.
Need to change the sparkplugs on your 1994 Honda Accord? No problem, the internet has the instructions. Need to make the world’s best cup of coffee? Not a problem. There’s a subreddit devoted to the topic. Want advice on how to make your partner happy between the sheets? Need to cut your own hair? Need money advice? The internet has answers.
The web is a great resource for advice, and it’s democratized knowledge in ways that we could barely have imagined 50 years ago. It’s also a cesspool of misinformation, Ponzi schemers, and a haven for flimflammers of all stripes. It can be difficult to determine which advice is legit and which isn’t.
By “legit,” I mean advice that’s not solely a self-interested sales pitch. It’s widely known that on Wall Street everyone “talks their book.” Those who talk their book are what my academic friends call “thesis-driven.” Like our barber, they’re heavily invested in their own opinion. A thesis-driven argument cherry-picks data to support a specific, predetermined conclusion. By contrast, legit analysis examines all the data available and then formulates a conclusion based on the evidence.
We readers and contributors at HumbleDollar are also invested in our opinions. For example, I’m basically a Boglehead when it comes to investment strategy. Like many HumbleDollar readers, I’m a buy-and-hold long-term investor of globally diversified stock index funds.
So, what if someone asks me today, “Is now a good time to invest in the stock market?” What am I going to say, “no”? Is it not better for me, as a shareholder, if more investors continue to buy stocks instead of, say, gold? If there’s more demand for what I own, it’ll push share prices higher and that’s a good thing, right? Are we indexers also “talking our book”?
Yes, share prices rise as demand increases. But if you’re a truly long-term investor, such price action isn’t necessarily a good thing. As Berkshire Hathaway’s Warren Buffett once asked rhetorically, if you intend to be a net buyer of stocks for the foreseeable future, why do you want their prices to rise? He argued, “Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
When we buy stocks, we’re ultimately buying a slice of future earnings. Companies distribute a portion of these earnings to shareholders through dividends and share buybacks. They also reinvest a portion of those earnings into their businesses, with an eye to generating even greater earnings in the future. The more we pay for those earnings today, the lower our future returns will be.
In the long run, any increase in share prices ultimately reflects earnings growth. As buy-and-hold owners, we passive index fund investors expect a rate of return equal to the dividend yield at the time of our initial investment plus growth in earnings per share. That’s it. Any return greater than that sum is, as Vanguard Group founder Jack Bogle argued, the product of speculative price movements—and shouldn’t be counted on.
If this thesis is correct, there’s no need to “talk it up” in an effort to bring others into the indexing fold. The argument doesn’t need to win the popular vote, and it doesn’t require investors to “buy the story” for it to succeed.
Through index funds, I’m not investing in speculative short-term bets, where I’m wagering on where share prices may go in the near future. Rather, I’m investing in businesses that generate and increase earnings. It’s a strategy that transcends the latest investment fashions, and instead is built upon long-term earnings growth. Even our hypothetical barber would—I hope—concede that such an investment style is indeed timeless.
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. Check out Jamie’s previous articles.
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I’ve often wondered, how does a buy and hold investor make money on a stock that doesn’t pay dividends? If the share price rises but you never sell it, then you never make money on it.
Very few people buy and hold until they die. Most will sell at least some of their shares eventually, and that is when they make their profit.
Jamie, good article. One of the earliest lessons I learned from Jonathan’s Getting Going columns many years ago was that you don’t have to beat the market to reach your financial goals. Indexing is a great way to go.
We don’t want to talk up indexing too much because it requires a critical mass of trading intended to beat the market.
Indexing also requires significant gov’t regulations on trading, retirement account rules, and consumer protections. Just about everything discussed in HD relies on both regulation and capitalism.
As for the math of reinvesting dividends, I tell my kids that they want high dividends reinvested and very little capital appreciation. Then the day before they sell the stock, they want it’s price to soar.
Fortunately there are always people who want to trade, either because they must, they enjoy it, or they believe they CAN beat the market (and a few of them are actually right!). I have faith in the power of optimism + greed!
My answer if someone were to ask me,”So, what if someone asks me today, “Is now a good time to invest in the stock market?”, would be if you are planning on being a long term investor is it’s always a good time to invest.
Looking at the historical returns of the US stock market the above advice is true, and the sooner one gets going, and the longer they are invested, the higher their returns will be.
Jamie: My barber works Wednesdays to Saturdays. I made an appointment today for 11:00 am tomorrow.
I am a Boglehead as well, but I am contemplating a change. I have been a devotee of the 4 fund strategy for over a decade but I retired in January, and I have been rethinking my strategy.
I am covering from the Four Fund Vanguard Strategy to a New Three Fund Strategy, of VOO, VUG (or SCHG), VYM (or SCHD). The breakdown will be 40%/10%/50%. I sold my Total US Bond and Total International Bond holdings, as I purchased a series of FIAs with Income Riders that provide the “protection” bonds use to provide.
The remaining portfolio is split between VTI and VXUS. However, I am contemplating selling my VXUS and investing those dollars into VUG and VYM, or SCHG and SCHD. Bogle himself didn’t think you needed to invest in non-US companies, and I am beginning to think he was right. Haven’t made my final decision yet, but I will by July 1, 2024, my next scheduled meeting with my Vanguard PAS advisor. I have not strayed outside of Vanguard in the past 15 years, but I am considering it, as previously mentioned. I am also considering terminating my PAS relationship, and doing the rebalancing annually and doing any tax loss harvesting myself.
The NEW Three Fund Portfolio has outperformed the Old Three Fund Portfolio over the past decade, by a significant margin, and as a devoted Index Person, I am simply reassessing the right combination of Three Funds.
Enjoyed your article.
Are you sure you’d want to divert from what you’re calling the “old” 3-fund portfolio simply due to one decade of under-performance compared to the “new” version? If anything, I would think that might lend toward sticking w/ the “old” portfolio in anticipating reversion to the mean, if nothing else.
Reversion to the mean…great point, but as Paul Harvey use to say, “The Rest of the Story…” is I am 73 years old and I retired in January 2025. My current portfolio is too Aggressive, with 80% in VTI and 20% in VXUS.
My Vanguard Advisor has been recommending the position in VXUS. He actually wanted it to be even larger. Personally, I don’t really believe foreign stocks have that much to offer, compared to the US, and I would rather have passive dividend income. I might keep 5% in VXUS, but no more.
He was also not in favor of my moving my Bond Investments into annuities, but since I actually know more about annuities than he does, I made that decision on my own.
In a few years, when I start to turn on my annuities, in a stair step fashion over 6-8 years, the income will be income tax free, since I bought the annuities with Roth Dollars.
Don’t you worry that you might be chasing past performance?
Not really. The greatest change will be in the acquisition of dividends in amounts larger than received currently, when I reduce my current VTI position, and acquire either VYM or SCHD.
My Current Equity Position is too aggressive for a 73 year old that retired 5 months ago. (80% VTI/20%VXUS)
It’s kinda like being asked “when is the best time to plant a tree?”
My answer invariably is …
“Ten Years ago … (pause) … and today”
Jamie, I immediately stopped reading after that first question and texted my barber for an appointment.
Another good thought provoking article.
If someone asks me if it’s a good time to invest, or what to invest in, I tell them the truth – I have no idea, and no one else does either. After that I would give similar thoughts about long term investing in broad, low-cost indexes. If it’s a young person I tell them to think seriously about investing in their human capital. Not everyone likes these answers.
Agree no one knows, but based on history, if we were to always answer yes, we’d be right more than half the time.
Nick article Jamie.
And thanks for a well written and enjoyable article.
As nick Murray says the stock market has a Permanent Trend-ITS UP
But suppose that enthusiasts do talk up the S&P 500, and everyone starts investing in it. You can’t lose! The index is the whole market! You don’t need to understand what the companies do, or analyze corporate financials – in fact, the people who do so are fools, and they will lose their money.
If enough people buy into this, the S&P 500 stocks will have a huge tailwind. Every month, billions of dollars will flow into 401K accounts, and the administrators will buy the S&P, regardless of price. Shares of the largest components of the S&P will see consistent demand, and have the biggest gains. This will increase their market cap, causing S&P 500 fund to have to buy even more shares.
Is this good? Will it end some day? If so, how? If you are investing large sums of money, you have to ask yourself these questions.
The success of index investing has been known for many years without your hypothetical scenario occurring. I think it is safe to conclude that there will always be a large group of investors who are unable to resist the possibility of striking it rich.
I wonder about this, too. Will we asymptotically approach a time when no one owns individual stocks and the only stockholders will be funds? Will there be a time when there are no individuals making requests of companies to do the moral or “right” thing – and therefore pursue only the bottom line regardless of the facts? Some folks think that’s what happened to Boeing, and there are many other examples.
The S&P500 Index is about 80% of the whole US market. It does track the whole market index very closely.