Page 206 - Psychology of Money - Timeless Lessons on Wealth, Greed, and Happiness-Harriman House Limited (2020)
P. 206

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
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                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.
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