The Easiest Way For Index Investors To Lose Money
Part 3: Irrational Investing Mistakes And How To Avoid Them
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Part 3: Irrational Investing Mistakes And How To Avoid Them
In Part 1 of this book, I made the case for why index funds are the rational way to invest in stocks.
In Part 2, I reviewed the most popular alternatives to index investing you will be pitched throughout your investing career and discussed whether each had a place in the portfolio of a rational investor based on the best available evidence.
In part 3, I will wrap everything up by reviewing the most common irrational investing mistakes and how you can avoid them.
Part 3 is the most crucial section of this book because it’s one thing to look at the evidence and agree that index investing makes sense. Sticking with a buy and hold indexing strategy is very difficult over a 40-50 year timeframe when there will be a lot of people constantly trying to scare you into selling at the worst possible time.
Most of these mistakes are driven by fear. The purpose of this final section of the book is to give you the data and tools you need to push back against the fear-driven narratives the financial media uses to hold your attention and sell ad space.
Chapter 22: How Do You Lose Money With Index Funds? By Timing The Market
If most people were asked to name the biggest threat to their investments, they would probably say it is an economic recession or a financial crisis that leads to a stock market crash.
If you invest in low-cost index funds, you would be wrong; a stock market crash is not the biggest threat to your investments. You are the biggest threat to your investments. The easiest way for index investors to lose money is to try and time the market.
What is market timing?
Market timing is an investing strategy where investors move in and out of the market in an attempt to avoid losses and buy back in at the bottom after the market crashes.
Investors who time the market believe that they know what will happen in the stock market. Anyone who thinks that is delusional because no one knows what is about to happen in the stock market.
Someone trying to time the market would sell their stocks if they believed the market was about to crash. In doing so, they would avoid the pain of the losses that come with a market crash.
When the market has hit bottom, they would reinvest all of their money and ride the market back to the top and make themselves rich. It’s the ultimate embodiment of “buy low, sell high.”
The idea of market timing is a great narrative, but when we begin to examine it closely, it becomes clear that it is nearly impossible to pull off in reality.