Ryan Frailich, CFP®
Put Your Investments on Cruise Control
The other day, I was driving with my son after an afternoon strolling Magazine St. Right after we got on the highway, a crimson colored Chevy Malibu came up insanely fast in my mirror, and swerved into the left lane about 10 feet behind me. I’m a Dad now so of course I shook my head and thought typical Dad things about damn reckless drivers.
As I kept driving on I-10, I watched the car swerve from left to right lanes a half dozen times, accelerate rapidly, hit the brakes suddenly, etc. As I approached the exit for our house, the car cut back from the left lane in front of me and headed off the exit first. Our exit is one of those long ones with other cars merging, and as that happened, the Malibu moved over and ended up one car behind me at the stoplight.
The car reminds me so much of what I see people do when they learn just a little bit about investing. They are constantly looking for a quick path, and whatever’s good at the moment seems like the right plan. If that one dead ends, they swerve, heading in a new lane towards their destination. As their journey goes, they rack up costs in every which way, some seen and others under the surface. It’s stressful, with a constant stream of decisions to be made, and then new ones that arise because of the new situation you’re in. And yet, all that stress often gets you nowhere that setting a cruise control couldn’t.
Someone buys a stock or fund, rides it for a while, dumps it for something else. My favorite depiction of this is the image below:
Whether you’re an experienced investor or just starting out, this makes no sense, but it’s what happens all. the. time. People end up selling their investments near the bottom of their value and buying near the top. If your house dropped in price by half, would you put it on the market? If the house across the street went from $250,000 to $350,000 in 6 months, would you think it’s the perfect time to buy it? Framed this way the answer is obvious but reams of evidence says investors often do otherwise.
So how do we set the cruise control and get to our financial destination without driving like a damn moron?
Here are 5 simple tenets to follow to do so:
Have a timeline and destination in mind for your financial goals. What are you trying to achieve, and in what time frame? It’s okay if it changes, but, have clarity on this first. And if you need the money in the next 2 years, it probably shouldn’t be in the stock market at all. A high-yield savings account would be the right spot.
Determine an investment that makes sense for that timeline and goal. I’m a huge proponent of using low-cost index funds, as there’s little to no evidence that paying for high cost actively managed funds reaps any reward.
Implement your plan. Buy your investment and set up whatever recurring contributions you need to make it to your goal.
Check it annually. Maybe twice a year if it’s a shorter term goal. Do not watch it daily unless you want to be driven completely insane by the inevitable ups and downs that come with investing.
Arrive. More often than not, your best move in investing is no move at all. If your personal circumstances haven’t changed, it almost never matters what’s going on with big picture economics/a crazy election/weird weather/the month of the year/the downfall of retail stores, etc.
I’ve definitely oversimplified things here, and I think most people could benefit from talking with a fee-only advisor to get their plan setup properly. But the simple rules above will take you a lot further than you’d intuitively think. Less is more. Activity usually works against you. Don’t drive your investments like the moron in the Crimson Chevy Malibu. You’ll end up more stressed, run-down, and no further along than if you set the cruise control at the start.
For more on index investing, read here:
The Beginners Guide to Index Investing