Recently, I read in a book that a simple life doesn’t always mean an easy life. After reflecting on this for a moment, it occurred to me that that the same is true for investing. While I consider my investing style to be simple, it can be difficult to endure when fear gets in the way. Let me explain:
Passive Investing Doesn’t Mean Doing Nothing
I adhere to the passive index investing philosophy of investing because of the overwhelming majority of research that suggests that managers underperform their benchmarks. Here’s why investing this way is simple:
You don’t have to pick the winners
If your actively managed mutual fund is having a bad year or two, or your broker’s stock choices seem to be wrong, you have to begin looking for a new mutual fund or broker. With an index fund, you do what the index does minus fees. There’s no guesswork.
It’s easy to pick funds
You can just pick an index fund that matches your need, i.e. large, mid, small, international. I usually pick funds that have really low expenses because expenses are one thing you can control.
Now just because you have a simple index investing lifestyle doesn’t mean everything is easy. Index funds go down too! That’s where the hard part of a simple index investing life takes place. How do you endure the difficult times of market slides?
You re-balance.
Re-balancing gives you just enough satisfaction to say you’ve done something about the market downturn. It satisfies that need for control and it usually means you’ve sold the better performing index funds in your portfolio and bought the worse performing funds. In other words, you sold high and bought low, which is what is so hard to do when you’re invested in the stock market.
So the next time you’re researching mutual funds, or searching for a new broker, check out index funds. They do go down, and past performance is not indicative of future performance, but they sure are easier to hold onto and re-balance, when markets go south, especially when you’re investing in a bear market.
