It’s Not About the Timing, Timing, Timing

So I have this weird friend who is super random and texts me like the most RANDOM texts ever (No hate here, we’re good friends and she’s totally cool that I’m blogging about her hahahaha). After not hearing from her for like 2 months, I get this text message:

“Hey lionie~ What % of your money do you put in STI and what else do you put your money in? Do you think now is a good time to go in?”

First of all, nobody calls me “lionie” (zomg?!). Next, I really love the phrase “do you think now is a good time to go in?” because hell, it’s on everybody’s minds isn’t it? Everyone is obsessed with when the “right time” is, as if there’s some sort of magical moment to invest that’ll make you rich like, forever. I can totally see why: It’s the same reason why buying McDonald’s lunchtime Extra Value Meals for $4.50 feels so damn awesome – because we’re getting it cheap. Everybody could use a midday Big Mac with fries (mmmmm!) and nobody wants to get ripped off.

We take this psychology to the investing arena, and suddenly, we’re lost. Suddenly, those chicken mcnuggets that were $4.50 an hour ago are now $6.20! Wtf?!! But if I don’t get them now, what if they rise to $12 a piece? Or maybe I should wait and let them fall back to $4 for a six-pack? When is a good time to go in? When? When??? You’re not alone – the professional investing community is obsessed with the idea of timing. Pick up any business newspaper, turn on CNBC, and you’ll see stock calls screaming at you to “Buy” and “Sell” NOW, or be forever banished to the poor house. I hate it – I hate anything that pressures me to do something with my money NOW. This applies to stocks, and those annoying “Call now and receive a new abdominizer absuh-lutely FREE!” informercials”. They are way too stressful, and they cause you to make terrible decisions with your money.

What’s the trouble here? This philosophy assumes that investing is a huge, epic, life-changing moment. My friend was super concerned about when she should invest because she saw it as a significant, one-time decision. But think about it – there are a gazillion moments in life. What are the odds that the one you pick to invest your money in will be that one, magical moment when the market bottoms out?

Instead, let’s forget about being “right” and let’s focus on seeing investment as a lifestyle decision, just like brushing your teeth or cleaning up your dog’s poop. It isn’t sexy, it isn’t the most fun, and you’ve got to do it regularly or you’ll end up with a big mess. But if you don’t get it right a couple of times, no one is going to die. That’s a whole lot less stressful, isn’t it? The truth is, the market goes up and down and is volatile as hell. In all likelihood, we’ll never be able to pick the “best” or the “right” time to invest, so why bother trying? So when the ladies come up to me and adoringly ask “Oh, Lionel, tell us when is the best time to go in?” I put on my most charming smile ever and go “Baby, just dollar-cost average.” (Yeah, you know that totally gets me laid).

What is dollar-cost averaging and why is it awesome? Dollar-cost averaging means that you invest a fixed amount of money into the same stock, or ETF, or fund, at fixed intervals. So, for example, you might invest $500 into a certain stock every month, or $1,500 every quarter. The actual interval doesn’t really matter. What matters is that you invest a fixed amount every time. Unlike the “invest all your money at once” mentality, which forces you to predict when is the best time to invest in, dollar-cost averaging is a system, a system that lets you invest at the overall average price of the market and lets you smooth out the price which you enter in.

Say you invest like $1,000 per month into a stock market index ETF. Some months you may be investing when the market is super cheap at $100, so you manage to buy 10 units of it. The next month the market rises to $200, so you only buy 5 units of it. The next month the market falls to $50, so with that same $1,000 you load up on 20 units of it. So when the market is cheap, the system lets you buy more of it, and when the market is expensive, you buy less of it. Overall, you’re pretty much guaranteed the average price of the market. You’re not getting in at the bottom, but you’re also not running the risk of putting all your money into the market, just before it takes a nosedive southwards. With the reasonable assumption that the market is likely go up in the long run, getting in at the long-run average price means that you’re likely to end up in the black, given a long enough time horizon (we’re talking 20-50 years here).

What about periods like 2008-2009, when the market was trending down? People who dollar-cost averaged got themselves into market at lower and lower prices as the market fell, accumulating all those units at cheap prices and making themselves well-positioned for the recovery from March 2009. Contrast this to the herds of investors who piled into housing stocks at the height of the bubble, only to watch their nest egg crumble in 2008, and then panicked and sold right before the recovery. Dollar-cost averaging works best when the market is at its most volatile, because it helps you to take advantage of the volatility by buying a both high and low prices to average out your buy-in price. I’ll spare you the details, but this video from Mike at Oblivious Investor shows how with dollar-cost averaging, the volatility in the market goes from being your enemy to your friend.

What’s even more awesome? Most academics and economists are already predicting that we’re going into an age of increased volatility with more crashes and more bubbles, occurring at increasing frequency. Even more reason not put all your money in at any one time, because you never know what’s going to happen tomorrow. So why risk it?

Like any system that I love, it can totally be automated. Most fund providers offer the option of a “Regular Savings Plan” or a “Drip-feeding” plan that lets you dollar-cost average a pre-determined amount into whatever security you choose. Even if you choose not to automate it (I don’t because my broker doesn’t let me), it takes a couple of clicks to invest a fixed amount at regular intervals. No stress, and no worries about where the market is going to go tomorrow. Just a plain, simple system. It ain’t sexy, but it works.


Treat A Friend To Lunch

I’ll let you in on a little secret: Being happy doesn’t depend on how much you earn, but how you spend your money. 

We’ve all heard that money doesn’t buy happiness – Multiple studies have shown that beyond a certain (surprisingly low) income, happiness very little to do with how much you have. Yet, we spend all this energy worrying about how we’re going to buy that ridiculously expensive house, that car, that iPad, and all the bling bling in the world – only to find that when we’re finally able to afford them, they’re not gonna make us a whole lot happier. Kind of stupid, isn’t it?

The trouble with possessions is that we get used to them. Really quickly. How many of you look at your iPhone and marvel at its technological wonders and go “Wow! I really don’t need another gadget for the rest of my life! Love AAPL ❤ ❤ <3”. Nope. Instead, we aimlessly flick through our apps, lock and unlock our home screens, and complain about the shitty battery life that can’t even last you till lunchtime. Retail therapy doesn’t work – and the rest of your possessions aren’t going to make you consistently happy either.

Here’s my contention: I think you can be a helluva happy right now. At this very moment. WIth the income you’re earning. How? Pick up your phone and arrange to meet someone this weekend. For brunch, for dinner, for drinks, for a museum, for a picnic, for a concert. Oh, and offer to pay.

What?! But personal finance is all about saving money, is it not? How the hell am I supposed to save money when I’m friggin PAYING for people all the time? Die, you freeloading leeches, die!!! Just stop for a second and think for a bit here – what are you saving all that money for? I don’t know about you, but I only want two things out of being rich: security and happiness. I’m pretty confident that your financial security’s pretty easy to take care of with a basic savings and investment plan, that I’ve ranted about here previously. (In fact, this article writes that you can pretty much live a super happy and comfortable retirement by by investing $1,1,65 per month at 8% p.a for 35 years. Or, if you’re married with a spouse earning $50k per year, that amount drops to just $303 per month).

So security is taken care of, and with the amount of money left over, you just have to address the “happiness” part of it. And according to Laura Vanderkam, author of the upcoming book “All the Money In the World”:

“Planned pleasant experiences give you a triple happiness whammy. You anticipate them beforehand – and as any kid waiting for Christmas knows, anticipation is often as pleasurable as the experience itself. You live through your adventures, and then you savor the memory afterwards. Eating is, of course, one of the most pleasurable things people do. In one study in which women reported how happy they were at different points of the day, eating ranked just below sex.” (from this Yahoo Finance article)

The point is, experiences count. And if you want to be happy, then spend as much as you can on experiences. I don’t really spend a lot of money on stuff. I think I own like 4 shirts and 2 pairs of jeans that I pretty much wear over and over. I don’t own an iPad or a car (and I don’t see the need to own either within the next few years). I spend pretty much all of my guilt-free spending account money on dance classes, vacations, drinks with friends, and lately, exploring yummy restaurants throughout Singapore with amazing company 🙂 Last Tuesday, I had a bowl of steaming hot pho noodles with beef balls, got treated to a Ben & Jerry’s waffle with TWO SCOOPS of ice cream (zomg life win), and then sweated it out at a helluva fun dance class. I came home at midnight, and collapsed into bed with a huge smile on my face. And that, my friends, is happiness 🙂

How Not To Suck At Investing

Here’s the problem about investing – we know that it’s good for us, but most people suck at it. We all have an uncle somewhere who lost his entire retirement savings by betting on Asian stocks in 1997, tech stocks in 2000, or financial stocks in 2008. He held on to his portfolio as the market plummeted, losing thousands of dollars every day, until he couldn’t take the pain anymore and got out.. only to see the market climb back up again. On the flip side, we see research that says individual investors pulled more money out of the stock market…. only to watch the Dow march higher and higher. (as reported in the WSJ)

There are thousands of reasons why people suck at investing – behavioral biases, having way too many choices, overconfidence, etc – but I think the number one reason is that people just have the wrong idea of what investing actually is. Here’s what runs through most people’s heads when someone tries to talk to them about investing: “Investing… how to get rich! Picking stocks. What stocks do I pick? Maybe Facebook. Or Apple. Hope the price rises by like 10x next year and I’ll be RICHHHHHH. Ca$$$h money baby!!” Zomg. Kill me now.

Newsflash dude: Investing isn’t about picking stocks. I’ll say that again: Investing isn’t about picking stocks. Now say it to yourself three times every night before you go to sleep.

Okay I’m hearing the crowd of angry “investors” outside my door, armed to the teeth with pitchforks and torches right now: What?! It’s not about picking stocks?  But Warren Buffett, the world’s greatest investor, says we should pick good businesses at cheap prices, and hold them till like, FOREVER. And then we’ll be rich!! True, you could totally do that successfully… if you were Warren Buffett. He owns Berkshire Hathaway, a company of full-time, well-trained researchers and analysts who spend their entire careers searching for good companies to buy. He has contacts with Fortune 500 CEOs and can meet with them whenever he wants. He understands things about the businesses he buys that no individual investor can even dream about. Now if you think that simply picking up a book entitled “How to Pick Stocks Like Warren Buffett” and flipping through a few annual reports is going to make you a superstar investor… think again.

So investing isn’t about picking stocks. Rather, it’s about putting your money in assets that will grow over time and will generate an income for you. That’s it. Sure, you could plough your money into Facebook or Apple or whatever the hot stock is at the moment, but is there a chance that it could plummet to zero in 10 years? Of course. Companies fail all the time – all it takes is one CEO scandal, one accounting fraud, one new player on the market (think about what Google did to Yahoo), and your company, once the darling of all the investment pundits, is filing for Chapter 11. I’m not saying that individual stocks are bad investments – of course there are many that have a long history of excellent returns – but there’s another asset that provides awesome returns, with way lower risk than any single high quality stock you can find out there. It’s called the stock market. (cue dramatic music – bom bom bomm!!!).

Think about it – companies fail all the time, but it’s impossible for the stock market to go to absolutely zero, unless we get annihilated by a huge alien spaceship, in which case you have bigger things to worry about. The stock market literally comprises of thousands of stocks, and thus for it to go to zero would involve all the companies in it to go bankrupt – ie: extremely unlikely. Remember back in Finance 101 when they used to tell you that diversification is the key to successful investing? Well, buying the entire market effectively diversifies away the risk of any individual company. It’s not entirely riskless (to my financial nerds out there, you still have “market risk” to deal with), but it’s a whole lot less risky than owning any particular stock.

Another thing – the stock market has an impressive track record that’s freakin hard to match. I can’t think of any individual stock that has been around for the entire duration of the stock market’s 200-ish year old history, with a historical return of 7 – 9% per year, depending on who you talk to.

Okay, I’m hesitant to make the ginormous claim that the stock market always goes up – there have certainly been periods where the stock market has fallen, or stayed stagnant – but give it sufficient time (10, 30, 50 years-ish), and there’s a pretty high chance that it is likely to go up. Why do I think so? Three reasons:

1. Inflation – For most developed economies, prices rise. I don’t think we’re going to go back to those times where McDonald’s serves $5 extra value meals 24-hours a day. (no, those lunch hour deals dont count – I swear they cut the patties in half). Prices of things rise over time, including the prices of your stocks.

2. Survival – the stock market will always be comprised of awesome, solvent (ie: non-bankrupt) companies. If a company goes bankrupt, its stock is automatically removed from the stock market index, and replaced by another. Crappy companies get cut out, and replaced by better, sexier companies. Apple may be the most valuable company in the world right now, but in 30 years it could be bankrupt, and replaced by another trendy company where its fashionable for top management to wear tight-fitting black tees. Owning the stock market index ensures that your portfolio always comprises of the best companies in that market. It’s like being able to fire that one douchey, useless employee in your company, without the guilt or death threats.

3. Population growth – Let’s face it, even with the explosion of investable assets today, stocks remain the de facto investment vehicle of choice to most investors. They aren’t as sexy as fixed income or exotic options (I believe the job posting of “equities in Dallas” is still a laughing stock in the IB world), but nothing trumps the liquidity, the ease, and the transparency of the stock market. And as the world gets larger, more educated, and richer, guess where’s the first place they’re going to plonk their money into? That’s right – the stock market. And Economics 101 teaches you that as demand rises… so will the price.

Notice that everything I mention here is about really large, long-term macro trends. In all likelihood, prices will rise, good companies will replace bad ones, and the world population is going to get larger. I haven’t even talked about the number one economic reason why I think the stock market will rise: Because it’s comprised of businesses. Hundreds and thousands of businesses that earn more every year, year after year. Essentially, buying the stock market means putting your money behind the fact that business will continue throughout the world. And in my opinion, that’s a pretty strong bet, discounting the scenario that the world dissolves into anarchy and we all degenerate into Fred Flintstones. (Always wanted to try those cars with no floors that let you walk everywhere)

So how would you be able to own the entire stock market? It used to be ridiculously expensive to own the entire market because you would have to buy thousands of shares, but now you can do it with a low-cost index fund or ETF (but I’ll leave that for another time).

But don’t take it from me, take it from Warren Buffett, who mentioned that a low-cost index fund, is probably “the best investment that most people can make.” So you may not be able to invest like him, but you sure as hell could take his advice. Think about it 🙂