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How my family thinks about investing
I started my career as a stock picker. At the time we only owned individual stocks, mostly large companies like Berkshire Hathaway and Procter & Gamble, mixed with smaller stocks I considered deep value investments. Go back to my 20s and at any given point I held something like 25 individual stocks.
I don’t know how I did as a stock picker. Did I beat the market? I’m not sure. Like most who try, I didn’t keep a good score. Either way, I’ve shifted my views and now every stock we own is a low-cost index fund.
I don’t have anything against actively picking stocks, either on your own or through giving your money to an active fund manager. I think some people can outperform the market averages—it’s just very hard, and harder than most people think.
If I had to summarize my views on investing, it’s this: Every investor should pick a strategy that has the highest odds of successfully meeting their goals. And I think for most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success.
That doesn’t mean index investing will always work. It doesn’t mean it’s for everyone. And it doesn’t mean active stock picking is doomed to fail. In general, this industry has become too entrenched on one side or the other—particularly those vehemently against active investing.
Beating the market should be hard; the odds of success should be low. If they weren’t, everyone would do it, and if everyone did it there would be no opportunity. So no one should be surprised that the majority of those trying to beat the market fail to do so. (The statistics show 85% of large-cap active managers didn’t beat the S&P 500 over the decade ending 2019.)⁷¹
I know people who think it’s insane to try to beat the market but encourage their kids to reach for the stars and try to become professional athletes. To each their own. Life is about playing the odds, and we all think about odds a little differently.
Over the years I came around to the view that we’ll have a high chance of meeting all of our family’s financial goals if we consistently invest money into a low-cost index fund for decades on end, leaving the money alone to compound. A lot of this view comes from our lifestyle of frugal spending. If you can meet all your goals without having to take the added risk that comes from trying to outperform the market, then what’s the point of even trying? I can afford to not be the greatest investor in the world, but I can’t afford to be a bad one. When I think of it that way, the choice to buy the index and hold on is a no-brainer for us. I know not everyone will
agree with that logic, especially my friends whose job it is to beat the market. I respect what they do. But this is what works for us.
We invest money from every paycheck into these index funds —a combination of U.S. and international stocks. There’s no set goal—it’s just whatever is leftover after we spend. We max out retirement accounts in the same funds, and contribute to our kids’ 529 college savings plans.
And that’s about it. Effectively all of our net worth is a house, a checking account, and some Vanguard index funds.
It doesn’t need to be more complicated than that for us. I like it simple. One of my deeply held investing beliefs is that there is little correlation between investment effort and investment results. The reason is because the world is driven by tails—a few variables account for the majority of returns. No matter how hard you try at investing you won’t do well if you miss the two or three things that move the needle in your strategy. The reverse is true. Simple investment strategies can work great as long as they capture the few things that are important to that strategy’s success. My investing strategy doesn’t rely on picking the right sector, or timing the next recession. It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades. I spend virtually all of my investing effort thinking about those three things—especially the first two, which I can control.
I’ve changed my investment strategy in the past. So of course there’s a chance I’ll change it in the future.
No matter how we save or invest I’m sure we’ll always have the goal of independence, and we’ll always do whatever maximizes for sleeping well at night.
We think it’s the ultimate goal; the mastery of the psychology of money.
But to each their own. No one is crazy.
To understand the psychology of the modern consumer and to grasp where they might be heading next, you have to know how they got here.
How we all got here.
If you fell asleep in 1945 and woke up in 2020 you would not recognize the world around you.
The amount of economic growth that took place during that period is virtually unprecedented. If you saw the level of wealth in New York and San Francisco, you’d be shocked. If you compared it to the poverty of Detroit, you’d be shocked. If you saw the price of homes, college tuition, and health care, you’d be shocked. If you saw how average Americans think about savings and spending in general, you’d be shocked. And if you tried to think of a reasonable narrative of how it all happened, my guess is you’d be totally wrong. Because it isn’t intuitive, and it wasn’t foreseeable.
What happened in America since the end of World War II is the story of the American consumer. It’s a story that helps explain why
people think about money the way they do today.
The short story is this: Things were very uncertain, then they were very good, then pretty bad, then really good, then really bad, and now here we are. And there is, I think, a narrative that links all those events together. Not a detailed account. But a story of how things fit together.
Since this is an attempt to link the big events together, it leaves out many details of what happened during this period. I’m likely to agree with anyone who points out what I’ve missed. The goal here is not to describe every play; it’s to look at how one game influenced the next.
Here’s how the modern consumer got here.
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