FIRE and stormy weather

If you look at the short term weather- there always seems to be a storm either here right now- or there are news reports of another one on the horizon. If you look at the financial news in the same way- you would think that there is always a storm going on. This week (well, past couple of months) it’s been Evergrande and their insane debt mountain. Brexit has been an ongoing concern for well over 5 years now, and that’s forgetting Covid that’s been with us for the past 18 months as well.

Stop looking at this week/month and even year

Imagine if you made money each time it was sunny- and lost money every time it rained. You would take particular interest in the weather right? Checking the hourly forecast, the daily forecast and even the weekly forecast to see if you were going to make money or not. Now think for a moment that you were a “weather trader” and you were making daily (or even hourly) decisions on betting/investing when it was going to be sunny. Ask anybody in the UK- and they will tell you we are a rainy country, where it rains way more than its sunny- right?

Data from:

Yet looking at the wider data that’s available- not once in the past 20 years has it rained on more days that it has not (178 days is the highest in 2000- which just happened to be a leap year of 366 days😉).

Zoom out

There will always be storms- there will always be financial shocks. Your response to these will decide whether or not you lose money (and regret your decision making) or make money from them. If you want to make money based on these- then you need to have an edge. Something that the companies full of very intelligent people making decisions will all the data & data modelling that you possibly can’t do (or maybe you can with your edge?).

Instead you can ensure you don’t lose money by doing nothing. Wait, what? Yeap, you heard me correctly, you need to not react to these events- and instead just sit there doing nothing. Let’s take a look at Covid for a moment:

S&P500 between January 2020-May 2020

Did you sell? Were you tempted to? At what point did you sell if you did? Rock bottom? On the way down? Nobody knew quite what the markets were going to do- there was quite a bit of panic- in just over a month the index lost 35% of it’s value. Unless you can accurately predict the future (in which case, why are you even reading this?)- the best thing you could have done is just sit on your hands.

That “massive” drop in early 2020? Already recovered and then some! So, sure, it may have been difficult to sit there watching your net worth drop- but even if you had sold- where do you buy again? A week later? A month? That recovery was quick- what if you are still sitting on your cash? You just missed the fastest recovery on record.

Index investing is boring but so easy

Choosing which companies to invest in, which to trust with your money- which products/services will still be around in 5/10/20/50 years time. All of that time, continually working out what (might) be the next big thing, how it’s going to affect the rest of the market. Get it (even slightly) wrong, and you lose out. This is why index investing is so easy. Pick the index (or indexes) you want to track, find a fund that does this well (for low cost), and start throwing money at it. Monthly/Yearly, doesn’t matter, just keep buying and buying. And, well, that’s literally it. You don’t have to follow the news, understand company financials, have an edge, or anything else. It’s insanely boring- because you don’t have to do anything. That company called Tesla that suddenly did really well? They are in the index now- and yes, you missed out on the initial growth, but you also missed all that risk that the early investors took on as well. If it continues to do well, then you share that growth as well- since its now part of the index.

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