Investing For The Long-term (Retirement)
Starting to Invest
5 min read.
Now that we have everything settled – the market index we want to track, the ETFs that are going to track it, and the broker with which we’re buying the ETFs – the only thing that is missing is wiring the money into our investment account in hit the button that says BUY BUY BUY!
But before we do, let me introduce you to a very important concept on how to move your accumulated savings into the stock market, which relates to how you should deal with market crashes, also briefly discussed below.
Dollar-Cost Averaging
So you want to move your accumulated savings into the stock market. You have two options. You can either do it all at once, buying all the ETFs you can afford at their current price, or ease your entry by spending a fixed amount regularly over some time. For example, if you have 12 000 € available to invest, you could invest 1 000 € per month for a year.
If you decide for the latter (easing over time), you’ll incur more commissions because you’ll do more trades, but you’ll take the benefits of Dollar-Cost Averaging. Dollar-Cost Averaging means making not one, but several purchases of your ETFs at different points in time so that your entry price is not determined by a single price, but calculated as the average of all your purchasing prices. You’ll be averaging your entry price through time, effectively protecting yourself from buying when the stock is high just before a crash.
Dollar-Cost Averaging does very well when you invest just before a crash because it will make you take advantage of the decrease in the ETF price. But it does not do so good when you invest on a low just before a surge, because then you’ll end up buying the ETF at higher prices then you would have if you had bought them all at once before the surge. So you might fall into the temptation to try to predict how the market will perform in the near future. If it’s going to go up, then you’ll decide to move your money into the stock market at once. On the other hand, if it’s going to go down, you’ll want to ease your move through Dollar-Cost Averaging.
But remember our basic assumption: we can’t know how the market will perform. Any guess we make will just be an “educated guess”, which amounts to very little. You should make all your investment decisions with the clear notion that you don’t know how it will perform in the short-term.
With this in mind, I’m going to ease my move into the stock market because I prefer to not make a significant amount of my investment be determined by one single random price that can easily crash shortly after my purchase.
What To Do When the Market Crashes
Talking about market crashes, what should you do if you see your investments in the stock market quickly decrease significantly in value? In the 30 years that we’re investing, we’re bound to suffer from several market crashes. Crashes that can go up to a 50% decrease in your total equity. HALF, GONE in just a few months. How are you going to deal with that?
In 2008, when the global financial crisis really erupted in the stock market, the first thing many people did was pull their money out of the market. That’s almost always a bad move. They compounded one mistake—not having a diversified portfolio—with a second: buying high and selling low.
—Ramit Sethi, I Will Teach You To Be Rich
It’s an integral part of our investment approach that we’ll ride the lows. That means that we won’t sell any part of our investment in a market crash. Moreover, we’ll keep putting our money into the stock market at those times. Our whole approach to investing is to track the market so that our investments perform as the market.
Note, however, that tracker funds simply match the market. If you own all equities in your twenties (like me) and the stock market drops (like it has), your investments will drop (like mine, and everyone else’s, did). Tracker funds reflect the market, which is going through tough times but, as history has shown, will climb back up.
—Ramit Sethi, I Will Teach You To Be Rich
The market’s long-term tendency is to grow. Sure, it will have its cyclical falls, but as surely it falls it will also climb back up, to continue its long-term upward trend. With this belief in mind, we’ll invest both when the market is low, and when the market is high. And we won’t sell any assets until our retirement, come hell or high water. That’s our plan. Are you able to carry it out?
Really, do ask yourself this question. Now that you know what I am proposing, the work it entails, and the mindset that it requires, does it fit your personality? Buying stocks and holding them is easy when their value is going up, but not so easy when it’s going down. What will you do when it’s going down? Imagine yourself in your 40s. You go online and learn that you’ve lost 30% of your equity since last week. What do you do? Close your eyes. Take your time. Is your answer an unequivocal “I’ll sit tight and ride it out, not selling any of my investments. I’ll turn off the PC and play with my children, acknowledging that I knew this was going to happen, and that it’s part of the plan. I’m not taking this decision now, I’ve already taken it years ago.”? If so, then you’re ready to invest in the stock market.