Do you REALLY know how the stock market works? Most people don’t. If you want to become an Automatic Millionaire, you must learn the basics when to buy and when to REALLY buy investments. Here’s a crash course for you…
A few years ago I insisted on taking over control of my parents finances. I got too tired of hearing my mom tell me that she was “not investing any money” during the times that the market was down. Ugghh…
10% Gain or NOT?
The stock market is like a roller coaster. It has its ups and downs (maybe that’s why I don’t like to ride them like my kids. Space Mountain anyone?) If you take a mutual fund that has averaged 10 percent a year over the past 20 years and look at the investors during that time period that were in it, you’d expect ALL of them to have earned 10%, right?
Let me explain…
Many investors react just like my mom does, if the market rises, they throw money in it BUT if it goes down, they stop contributing all together. If this sounds like your investing strategy too, you’re sabotaging your future retirement.
The founder of Vanguard, John Bogle, explains in his book, The Little Book of Common Sense Investing, that the average mutual fund reported a 10% annual gain from 1980 to 2005 (minus fees and expenses) BUT the investors in those funds during the same time period ONLY averaged 7.3% per year.
Why? Again, the fear of the market strikes again. Their fear of stock prices dropping caused investing “paralysis” but on the flip side, when the prices started to climb, they became excited and invested again.
Is this trend starting to sound familiar?
Here’s the results over that 25 year period:
- $50,000 invested at 10%/yr for 25 years = $541,735.29
- $50,000 invested at 7.3%/yr for 25 years = $291,046.95
- Cost of irrationality = $250,688.34
Average Investor or Automatic Millionaire?
So which one do you want to be?
- Buys actively managed funds (high fees)
- Gets excited and buys when the prices rise
- Feels bad when fund price drops, stops investing
- Buys index funds only (low fees)
- “Automates” investing monthly
- Loves to see price drops – it’s on sale!
Backwards View – Market Fluctuations
Back in 1997, Warren Buffett posted in a letter to Berkshire Hathaway shareholders, a quiz about market fluctuations. He wrote:
“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying.
This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
Warren Buffet Wisdom
Now you know that I’m NOT smart at all; I simply follow what the MUCH smarter and wealthier recommend and do it.
If you want to become an “Automatic Millionaire” consider changing what Michael Jackson sang about in the song, “The Man in the Mirror.”
Most people, unfortunately are easily conquered by their enemy in the mirror. They like buying investments when prices are RISING, and they get timid and nervous and quit when they see BARGAINS.
If you follow these principles, you’re well on your way to becoming an “Automatic Millionaire.”
As Warren also states in the above letter:
“When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefited Berkshire far more than do today’s repurchases, made at loftier prices.
At the end of every year, about 97% of Berkshire’s shares are held by the same investors who owned them at the start of the year. That makes them savers. They should therefore rejoice when markets decline and allow both us and our investees to deploy funds more advantageously.
So smile when you read a headline that says “Investors lose as market falls.” Edit it in your mind to “Disinvestors lose as market falls — but investors gain.” Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: “Every putt makes someone happy.”)”
I love that quote above, “Disinvestors lose as market falls — but investors gain.” I may just put that on my wall.
Attention K-Mart Shoppers
Consider starting to picture the stock market as your local grocery store. When you notice a sale in the newspaper on a particular item, say a case of bottled water (25% off), it’s safe to say it’s a great idea to stock up on them, right?
If you have at least five years to invest your money in the market, then you should be rejoicing as Mr. Buffett recommends and buy more when prices dip. When stocks are on sale, buy more or at least don’t STOP investing to take advantage of the decline.
What do you think? Do you continue buying stocks/funds when the market is down OR stop until it starts to rise again?