Investing Should Be a Little Boring
Beware of having too much fun investing.
Imagine you had the foresight to buy shares of GameStop in December 2020 when the company suffered a decline after missing quarterly revenue estimates. By the end of January 2021, you would be up more than 2,000%, turning a $1,000 investment into more than $20,000.
If you had bought Dogecoin in March of 2020 and rode the crypto boom to its height, you’d be up 36,000%, turning the same investment into more than $300,000.
Or, my personal favorite example, Monster Beverage. A perfectly timed investment in the 90s could have delivered a staggering 300,000% gain if you sold in 2021, turning a humble $1,000 investment into $3 million.
Just the prospect of these gains is intoxicating, but they’re incredibly rare, not to mention the fact that I conveniently cherry-picked this data to make a point. If you bought GameStop at the very top, you’d now be down nearly 70%. Your Dogecoin investment (if we could call it that) would be down 90%. Buying Monster stock at the top would only mean a 12% loss, but then again it’s an actual successful company and not some fad. Most traders who cut their teeth on meme stocks actually lost money. And most of the time, people will only buy into an investment after it’s been in the news, when all the money has already been made.
Every investor would love to pick a stock that goes to the moon, but if getting rich quick were so easy, everyone would do it. In reality, the stock market is an incredibly effective tool for getting rich slowly. Investing in a diversified stock portfolio requires time, patience and self-control to not constantly change your investments. You don’t have to dream of becoming a millionaire overnight. You can do it over your entire career.
Unfortunately, many traders and investors are convinced that the stock market is some kind of casino, although the recent downturn has likely washed out a good chunk of them. Fintechs and investing apps have made trading stocks, cryptocurrencies and even options easier than ever. Robinhood changed the way people traded stocks. Not only did they spark the commission-free revolution — which we’re all better for — their app features a user experience designed to make investing as exhilarating as possible. Until April 2021, the app would display a falling confetti graphic after users met key milestones, such as a first trade.
This and other features represent a broader gamification of investing that incentives more trading activity, which isn’t always good for your wealth. While gamification can get investors excited, this can go too far by encouraging riskier trading activities, like picking hot stocks that make headlines, frequent buying and selling and trading riskier assets like options.
There’s a much better approach, which is to invest consistently in a portfolio of index funds that cover the whole stock market. Historically, this strategy in the U.S. has delivered an average 8% inflation-adjusted return, meaning it would take you about 40 years to replicate your GameStop returns (or 140 years to replicate those eye-popping Monster stock returns) with index funds with the same initial investment. You won’t make a lot of money overnight. You may even lose money in the short term. But these returns are far more reliable and less risky to achieve. This is the boring way, but that’s why it’s better.
Investing is always exciting in the beginning. You’ve taken a leap that will change your finances forever. Goals that seemed unachievable before become achievable. Before you may have had a savings account paying a negligible interest rate. By investing your money, you can beat inflation and grow your wealth over the long term.
But otherwise, investing shouldn’t give you a thrill if you’re doing it the right way. Over time, the excitement wears off and your biweekly deposit becomes routine. You stop looking at your balance because the process of building wealth through index funds is slow and most times uneventful. Once you’ve mastered the basics, there’s little more you can do except keep investing consistently in the same portfolio, paycheck after paycheck. It can get a little monotonous. And that’s a good thing.
If you were to invest $500 a month into a Roth IRA (that’s less than the average car payment) and earned an 8% average annual return over 40 years, you would have accumulated about $1.7 million. Some people feel they need to invest in the latest crypto project or meme stock because they think the system is rigged against them or it’s the only way that regular people can make money by investing. This simply isn’t true, and shortcuts rarely work. You just have to be more patient.
Left to their own devices, most stock pickers might buy shares of their favorite company like Tesla or something they think is the next Google or Amazon. No one thinks to buy a boring shipping company. But that’s why index funds work. They give you exposure to an entire market that is self-correcting, efficient and diversified. It’s not a get-rich-quick scheme. Stick with index funds and you’re unlikely to lose money over time. And if you do, there are probably much bigger issues in the economy and one stock won’t save you.
Even if you get lucky with an individual stock or a cryptocurrency, the thrill of watching your investments go to the moon can give you a false sense of confidence. Hitting the jackpot has nothing to do with skill and everything to do with chance. Emotions run high whenever investors experience large gains or large losses, and that can lead to a spiral of bad decisions causing you to double down and lose more.
Such errors are easier to avoid if you invest in boring index funds. Diversifying across industries and countries protects you from the volatility of any one stock. Focusing on the long term rather than quick gains is more likely to get you to your goal. This tried and true method of building wealth may not be particularly exciting, but it is effective.