Yes, Investing Should Be Slow And Easy
FOMO leads to reckless financial decisions
A surprisingly dangerous time in your financial life is when you’ve built good financial habits, are saving consistently, paying down debt, and doing everything you should be with your money.
It’s at this point that a frustrating reality kicks in:
Building financial habits is simple. Sticking with those habits and building wealth slowly for years or even decades is hard.
Building a financial plan is exciting and fulfilling. You’ve decided to take major action to improve your life, and you are full of warm and fuzzy feelings. But after the adrenaline wears off and the day-to-day problems of life begin to pile up, it’s easy to feel tired and impatient.
It’s not so different from the first month of parenthood. When you bring your baby home from the hospital, you are sleep deprived and going non-stop. But you are so excited and full of adrenaline that you barely notice how tired you are. A few weeks later, once the adrenaline wears off, you begin to realize how exhausted you are.
But, much like the exhausted parent, someone trying to build wealth must find ways to cope with the daily fatigue because you are in it for the long run.
The siren call of getting rich quick
After a few months or even a few years of following good financial habits, you may feel like you have made little progress.
That is when you become very open to the idea of a wealth-building shortcut and engage with financial content like this:
Yes, investing in low-cost index funds—which buy the entire stock market— is a slower path to building a seven or even eight-figure net worth.
First, let’s start by defining what it means to be “wealthy.”
Wealth does not mean having a certain amount of money by a certain age. If your measure of financial success is having $12 million+ before age 50, you’re likely setting yourself up for disappointment.
Wealth means having enough money to live a life that makes you happy while choosing when, where, and how much to work. Wealth is not having “a lot of money”— Wealth is having a lot of money relative to your cost of living.
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Beware of financial strawmen
The Tweet I reference above makes a complete strawman argument which is great for engagement but bad for readers.
Yes, the quickest path to wealth is through “a great career,” which can come in the form of a 9-5 employee, starting a business, or both. As I have written in the past, wealth is built from a high income and living below your means.
But guess what?
If you have a high income, you can invest more money in the stock market through index funds. It’s nonsense to suggest that having a great career or investing in index funds are somehow mutually exclusive.
Continue increasing the gap between your income and your expenses, and you can speed up your wealth-building timeline with index funds.
“Concentrated bets” are a gamble
The author of the above Tweet also mentions making “concentrated bets” as a quicker path to building wealth.
The types of concentrated bets he is likely referring to include going all in on an individual stock. If you bought Amazon or Apple after the dot com crash, you made a killing over the next 20 years.
But the truth is that for every person who gambled in the stock market and made a killing, there are dozens of others who gambled and lost it all.
In chapter 11 of The Rational Investor, I reference a study that found that 4% of all publicly traded companies have driven 100% of the gains in the U.S stock market since 1926. That’s how freaking hard it is to pick stocks.
The only thing that matters is having that 4% of the winners in your portfolio. The only way to guarantee that is to literally buy everything, which is what index investing is. Yes, you will also buy “the losers,” but in investing, owning the winners is much more important than not owning the losers.
Strive for an active life and passive investing
Wealth is created from income.
The slow but dependable path to building wealth is to take a percentage of your income and invest it in low-cost index funds and not selling—AKA passive investing.
If you want to speed up the wealth-building process, you could take wild gambles with your money—or you could simply redirect that energy to finding new ways to increase your income.
If you feel the overwhelming desire to gamble with your money, that is likely a sign that either:
You don’t make enough money which leads to a lack of confidence that you’ll ever be financially successful.
You don’t like your job, and you look at these financial gambles as your ticket out of that job.
These are not portfolio problems—these are career or life problems.
The solution to low-income or a job that pays well but makes you miserable is not to gamble in the stock market. The solution is to find work that pays you well, and you enjoy doing.
That’s not to imply that it’s an easy task because it’s not. It’s a simple solution, but it’s hard.
In future posts, we can discuss how to find that Goldilocks zone of work that pays you well without sucking your soul— but I’ll conclude today’s discussion with a simple mantra for building wealth and enjoying life:
Aim for an active life with passive investments.
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.