When we were young, time seemed infinite and we lived in the moment. Now that we’re older (and possibly wiser), we know how limited our time is. Yet we spend much of it worrying about the future instead of enjoying what we have right now.
Don’t misunderstand: I am a huge advocate of planning, particularly of the financial kind. However, far too often, we get caught up in the joyless process of what we think is investing for our future when, in reality, we are ignoring our present.
Have you ever sat watching the ticker on CNBC? Do you check the price of the stocks in your portfolio throughout the day? Are you on the lookout for the next hot stock or worried that we are on the brink of market decline?
If so, you are wasting your precious time playing with your money instead of enjoying your life. Sure, you need to build wealth for future security and to have the means to enjoy some of the pricier aspects of life in retirement. But trying to time the stock market or pick the hottest stocks is unlikely to create more wealth than investing passively. Plus, obsessing about returns takes a lot of time and mental energy.
We like to think that we can “beat the market.” We have mighty egos that lead us to believe that we’re above average in almost everything we do. The reality is far different. We are very good at a very few things and there’s just no sense in wasting our time trying to be the best at everything.
I’d be willing to bet that very few of you are (or were) professional money managers, making a living building investment portfolios. So it seems likely that those who manage money for a living are generally better at it than you.
Every year, Standard & Poors (the company behind the S&P 500 index) calculates the success of all professional mutual fund managers. It has yet to find any data that would indicate that these experts—with all of their analysts and algorithms—actually manage to beat the markets.
The latest SPIVA (Standard & Poors Indexes Versus Active) study found that over five years ending December 31, 2018, over 82% of active large-cap stock fund managers failed to beat the S&P 500 index. If mutual fund managers with all of their resources are unable to outperform the stock market, what makes you believe you can do it?
Why waste time trying to make more money than the underlying securities markets provide when you could spend that time in pursuit of more worthwhile activities? Had you placed all of your money in the S&P 500 for the 20 years ending December 31, 2018, you would have enjoyed an average annual return of more than 6%. That’s after two bear markets and the “lost decade,” during which the S&P 500 lost 10% between 2000 and 2009.
Better still, had you created a globally diversified equity portfolio (50% U.S., 50% international), your annual average would have likely been about 8%. Even a boring balanced portfolio (60% global stocks, 40% U.S. government bonds) would have returned about 6% per year on average.
It’s far more likely that you’ll make more money by investing passively. So, wouldn’t it be smarter to stop playing with your money and spend more time playing in your life?
The host of the nationally syndicated Don McDonald Show for over 20 years, Don now co-hosts Talking Real Money with Tom Cock on Seattle’s KOMO radio Saturdays at noon (TalkingRealMoney.com). Don also publishes the online magazine RealInvestingJournal.com.