“A man on a thousand mile walk has to forget his goal and say to himself every morning, ‘Today I’m going to cover twenty-five miles and then rest up and sleep.”
-Leo Tolstoy, War and Peace
Tolstoy finishes War and Peace with a monologue of his world-view. Napoleon is not a heroic leader, but a chip of wood born on the flood of history. Events around him unfold based on a million little choices people made, caught between the tidal pull of necessity and free will. Tolstoy hated the prevailing “Great Man” historical philosophy of the time, which is what most historians in the mid-1800s believed in: that great men, charismatic leaders, changed the course of history and everything else floated around them.
Just like Tolstoy, you want to avoid a different type of Great Man theory in investing. Don’t listen to people (“Great Men”) who tell you they know how to invest better than the market.
Investing can be a little like Tolstoy’s War and Peace. The markets move in fluid ways, generally not based on the actions of any one person, but on a trillion little decisions made around the world. And as Tolstoy left you with his last thoughts in the epilogue of War and Peace, I would like to leave you with a few final thoughts.
(1) Buy and Hold. I want to be a buy and hold investor. That means I’m not going online and buying and selling stocks everyday. No one really knows for sure what the market is going to do at any one time. Even professionals get it wrong more often than not over the long-term. And even if you do buy a stock one day and sell it for more the next, it’s still hard to turn a profit. First you have to deal with fees you pay for buying and selling any stock. Second, even if you are using a free trading agency with no up-front buying fees, like Robinhood, you will have to deal with the bid-ask price, where you lose a little bit as either the buyer or seller (or both) to the broker that makes the transaction happen. Third, every time you sell stock, that creates a taxable event. If you hold a stock more than a year it’s considered a long-term capital gain, and taxed a lot less than if you hold it for less than a year, when it is taxed as a short-term capital gain. But either way, it is taxed and you lose a little of your profit. Fourth, you might get it wrong. If you don’t want to buy and hold, you not only have to get it right, but get it right enough to make up for all the fees and taxes you are paying on the ones you are correct on, AND correct enough to get it right for the ones you are wrong on. That is why I want to be a buy and hold investor.
Rebalancing is the art of keeping your investments in line with your long term plan. Remember talking about diversification? If I decide I want 80% of my portfolio to be stocks, and 20% to be bonds, rebalancing means making sure, after a year, or however long I want between rebalancing, that my portfolio looks like my plan. Say my 80% stock earns 10% that year, but my 20% bonds only earn 2%. By the end of the year, my stock will make up more than 80%. To rebalance, I either put more money into the underperforming asset (in this case, the bonds), or sell off some of the stock (but remember you might get taxed on this!) The cool part about rebalancing is that it forces you to “sell high, buy low.” Buy putting more money into the under-achieving asset, I am, at least theoretically buying more of it while it is cheaper, and by selling the overachieving one, I sell while it is more expensive and so get more bang for my buck. And because I only rebalancing, not taking all of my money out of that asset entirely, I still have plenty of that asset left over–in fact, as much (relatively) as I started with!
(3) Dollar Cost Averaging.
Dollar Cost averaging is simply the practice of putting money into an investment on a fixed schedule, regardless of what the market is doing. If you have a 401(k) or other employment based retirement program, this is what you are doing. You can also do this with your other investments. It’s not so much a strategy as away of thinking about the market. Uninformed investors are usually the ones who lose the most money in the market because they try to time it and get it wrong. They jump into an investment just as its peaking (although of course know one knows beforehand when that will happen) and sell after the crash. An easy way to avoid this, especially if you are a new investor without a large chunk of change to put away, is to use dollar cost averaging and just invest a fixed amount, regardless of the market, and watch your money grow.
(4) Fees. Wherever you look, there are fees. When you buy a fund, there is an expense ratio associated with it (“ER”) which is the administrative cost. If you use a robo-adviser like Wealthfront or Betterment or Acorn, you pay them an administrative fee (generally about .25% of your total investment), plus the funds where your money is invested will also charge you a fee, so keep an eye out for this. Watch out that these fees don’t add up and take a chunk out of your investing returns!
(5) There is so much more to investing.
With this “four-part” series on War and Peace, I’ve really only scratched the surface. As I’ve said, I’m not a professional financial planner. This information was presented as informational only. There is so much more out there, and you should definitely do some of your own research into whatever form of investing you are planning on doing. Good luck!