Why I Chose Passive Investing

This post is by a passionate reader of My Own Advisor who recently started her own blog.

I became interested in investing after I got my first pay cheque after college. I was lucky that my parents paid for my college tuition and I didn’t graduate with any debt, so when I finally made my first dollar on my first job, I was ecstatic.  I guess what separated me from my peers was that instead of going on a shopping spree, I decided to invest my first dollar.  However, without knowing anything about the stock market, I thought the only way to earn money in the markets was through day trading (thank you very much money-sucking infomercials). For the next two years, I proceeded to lose thousands in the markets, and it became quite discouraging.

What changed my entire outlook on investing was reading A Random Walk Down Wall Street by Burton Malkiel. In a nutshell, the premise of the book was that the market is a “random walk” that is unpredictable but an individual investor can win at investing through systematic investments in index funds.  Meaning, they don’t play the markets nor don’t dare day trade at all.

To illustrate the unpredictability of the markets let me paraphrase an analogy from another book, The Black Swan by Nassim Nicholas Taleb. Let’s imagine for a second that you are a chicken. Humans have given you food and shelter and affection since the day you hatched out of your shells. You track their affection levels, amount of food given, and other factors on a trending graph. Everything is looking up. Then, one day, they send you to the slaughter house!  From looking at the past data, how would you have been able to predict when that doom day would be? That’s right – you can’t.

In a sense, we are all like the chicken when it comes to investing in this analogy. There’s no way we will know when the next market crash will be. Every tool that we have to predict the stock market is backwards looking.  I think most investors fear the stock market.  It makes most of us panic sell when our investments are going down.  I am definitely a repeat offender, and I can tell you from firsthand experience that buying high and selling low is the fastest way to go broke.

So what can an individual investor do?

Can an investor still “win” with investing in the stock market?

Yes – through passive investing. All you need to do is to set up automatic withdrawals from your bank account to your brokerage account and invest that money into index funds that own equity markets from around the world.  You can also invest in a bond index fund to help protect your portfolio from major market slides.  Just avoid mutual funds with high money management fees!   Study after study has shown the returns on many mutual funds equal returns of index funds, yet index funds do not have the high management expenses fees that many mutual funds do.  This means you get to keep (and grow) more of your money.

In your portfolio, you can choose a variety of index funds that mirror the global stock and bond markets. I suggest taking a look at the ETF list on Vanguard and iShares.

I’ve automated my investing and now I’ve got my money working for me. I no longer care about the swings of the market because I now realize that markets can’t go up unless it comes down now and then, and vice versa.

Since the withdrawals from my bank account to investing are happening monthly, automatically, I’ve taken out all the emotions that come with investing.  I’ve set up a system that works beautifully, it’s simple, and you can too with just a few hours of work. I believe the key to passive investing is this:  you are not trying to beat the market; you are trying to BE the market.

Thanks for reading and to Mark for space on his site today. 

Happy passive investing.

Helena Liu is passionate about passive investing.

Mark:  Readers, what do you make of Helena’s decision?