I was perusing the Choose FI group on Facebook last week and someone posted something that went like this:
I pulled all my investments out of VTSAX in 2020 and have been sitting on cash ever since. I don’t want to get back into VTSAX. I’m looking for something that is passive, has a good return, and is safe.
Many of the comments were unkind.
You clearly don’t know what you’re doing.
Good luck with that!
I felt bad for the person who posed the question for a couple of reasons:
- They don’t understand investing. Successful investing can be difficult to accept because it’s actually simple. Humans are wired that to think that great results take great effort. Investing is one task that rewards minimal effort.
- They don’t have the temperament to be a successful long-term investor. If this person doesn’t learn, they’ll sit on cash forever. Not only will they miss out on gains in the decades to come, but they’ll also lose buying power to inflation. They’ll have to work until social security kicks in.
But back to their original question. The investment they were looking for is similar to unicorns and the easter bunny. It doesn’t exist*.
If it was that easy, everyone would pile into it. And then, the returns would decrease accordingly. Example:
- The Magic Unicorn Company (MUC) releases an investment guaranteeing a return of 8%.
- Since bank accounts only pay 2%, everyone throws as much money as they can at MUC. Hell, if this existed, I’d give MUC every cent I had.
- Then, the following would happen:
- MUC has to make money too. MUC is investing in something that earns more than 8%. It is passing some of the profits to investors and keeping the rest. However, if everyone in the world gave MUC money, it would run out of addressable market, so the party would quickly end as it would have to turn new investors away.
- Since everyone wants to give MUC money, its management soon realizes that it doesn’t need to pay 8%. MUC would decrease returns and take a bigger piece of the pie for itself. Simple supply and demand. If demand is extraordinary, you raise prices. Or in this case, lower the rate you offer investors.
If someone offers you great, guaranteed returns, it’s probably a scam. See Bernie Madoff.
You Must Take Risk (Or Put In The Work)
If you read a book like The Simple Path to Wealth, you learn that Mr. Market moves up and to the right over time. The reason for this is economic expansion caused by population growth and productivity gains. Of those two, the latter is more important.
However, the path is not linear.
There will be bumps in the road due to wars, speculation, pandemics, excessive exuberance, uncertainty, and a million other causes. It’s important to remember:
- You have no clue what will cause the next recession. Did anyone predict COVID or Ukraine?
- You have no clue when the next recession will happen.
- As long as humans keep getting better at stuff (productivity gains), economic expansion will continue and VTSAX will get bigger.
And you must have the following:
- Time: Investing is a long-term game. Stock market gains are anything but linear due to those unfriendly black swans. But over the long term, it’s up and to the right. Think in decades. The stock market is no place to keep cash that you’ll need in the short-term.
- An optimistic viewpoint: You must believe that most humans are good and working to do things better with more efficiency. I strongly believe that the best is yet to come.
Put In Work
And if you still don’t like the stock market and don’t mind putting in work, perhaps real estate is a better choice. House hack, flip houses, set up Airbnbs, or be an old-school landlord. However, if you go this route, you better put in the time to understand what you’re getting into.
Regarding the current state of Mr. Market, I’ll let some smarter humans have the final words.
A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success.
Mimicking the herd invites regression to the mean (merely average performance).-Charlie Munger
Widespread fear is your friend as an investor because it serves up bargain purchases.
Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.-Warren Buffett
More 1500 Days!!!
You can also find me (and the dinosaurs) at:
Mile High FI podcast:
- Facebook: Facebook group and page
- YouTube: My channel is mostly devoted to home improvement, but I have some other material coming up soon too.
- Instagram: Pretty pictures of dinosaurs, sunsets, and nail guns!
- Twitter: Spontaneous, often insane, ramblings
- Coworking space: On the surface, MMM HQ is a coworking space. Look a little deeper and you’ll see that we’re really building community. The members of MMM HQ are some of the finest people I know.
*I bonds are the exception, but the returns aren’t long-term and you’re limited to $10,000.
Join the 10s who have signed up already!
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*Only if your life is pretty bad to begin with.