8. Passive Investing
Posted on January 17, 2019
Today’s Letter from Grandma Sylvia
Life for so many people is often busy, even frantic, so sometimes it’s a pleasure to be able to sit back and not be actively involved in making more decisions. In fact, sometimes it’s even better to be passive rather than active.
Making decisions can be tough.
We are learning more about our brains and how we make decisions.
Here are some of the mistakes we can make when making decisions:
- Over-generalizations: making sweeping statement without knowing
- Limiting our beliefs: not exploring other options
- Judging biases: believing one thing is better than another without knowing
Rather than making monthly decisions on how, when, and where to pay bills, many people like to have them paid automatically. Some people like to have savings deducted from their pay automatically. While it’s important to check that the automatic deductions are correct, it can be a relief to have the work done.
Passive investing in the stock market is somewhat like work done automatically. If we invest in index funds, we don’t have to make decisions about what stocks to buy and when to buy and sell them. That is all done automatically to keep the index fund true to what it represents.
I had a friend who put his entire pension fund into technology stocks. When the tech bubble burst, he told me his retirement fund went down so much he had to work another eight years to compensate for it.
Investing in the market is never a sure thing and there are periods of great ups and downs. Investing in one sector, like technology, can be a big risk, especially investing in individual stocks.
I haven’t seen him recently but I hope he switched to index funds that represent a broad market base.
Today’s Topic: Passive Investing
Investing in index funds is passive investing versus actively picking stocks and other market assets.
I’ll give the argument for passive investing by providing a few quotes from the field:
- I’d compare stock pickers to astrologers, but I don’t want to bad-mouth the astrologers.
— Eugene Fama, Economics Nobel Prize Recipient
- By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when “dumb” money acknowledges its limitations, it ceases to be dumb. – Warren Buffet, CEO Berkshire Hathaway
- In the past 30 years, a $10,000 investment in the S&P 500 Index would have grown to $311,000 (after expenses); in the average general equity fund, the same investment would have grown to $171,950.” Burton Malkiel, author
- If I had it to do all over again, I would certainly index everything. Jason Zweig, Wall Street Journal columnist and author
- (Indexing) What a brilliant, ingenious, commonsense idea–for those who want to unclutter your financial lives and own a sophisticated portfolio.” Bill Schultheis, author of the Coffeehouse Investor.
♠ Be a passive investor and buy broad index funds.
Today I’m taking some time to clean out the car. Then tomorrow it will get a good washing. So nice to have a safe car that looks sparkling clean.