Nobody likes to peek at their investment portfolio after a day like today: a 390 point drop in the Dow (-2.4%), with the S&P 500 not much better at -2.2%.
But even though I toyed with the idea of brewing up a Cheerful Cocktail before I logged in to our Schwab account -- recipe: equal measures of anti-depressants, whiskey, potent marijuana, and caffeine extract -- I realized that our index fund investing approach would leave me feeling fine after I inspected our holdings.
Not happy. Not ecstatic. But fine.
Because since 2002 I've been a happy passive investor, having kicked the addiction of believing that I, or anyone else for that matter, can consistently beat the market. (See "Index Funds: the 12-Step Recovery Program for Active Investors.")
I described this approach in a 2009 post, "Index investing rocks and Jim Cramer sucks."
I've been a fairly serious investor for about twenty-five years. For quite a while I was the type of guy who'd be a Cramer acolyte. I subscribed to investing newsletters, researched stocks, tried to devise foolproof investing schemes.
Until I realized that I was acting foolishly. And started reading about index investing.
Since 2002 we've had a big chunk of our investments in DFA (Dimensional Fund Advisors) index offerings. DFA is a pleasingly geeky outfit. Their approach is highly sophisticated, as you'll see if you take their philosophy tour -- which starts on this page.
I don't claim to understand all the economics jargon. But I do know that I sleep a lot more soundly now that I've given up trying to outsmart the market.
Today our investment portfolio dropped in value by 1.1%.
That's exactly half of the S&P 500 decline of 2.2%. Which is typical, and unsurprising, since I aim for a roughly 50-50 mix of stocks and bonds. If stocks go down 2.2%, bonds will stay about the same or even increase in value as investors flock to safety.
Hence, we lose half as much as the stock market loses. But this isn't the only reason, or the biggest reason, why I'm largely unbothered by how global financial markets are behaving currently.
It's the passive investing, doing almost nothing in good times and bad times alike, that has made such a big difference in my outlook about our investment assets. I talked about this in a 2008 (bad times!) post on my Church of the Churchless blog, "Profitable spiritual investing."
As the world financial crisis deepens, conversations tend to turn toward money rather than other subjects. Last night I was with a group of people who discussed the ins and outs (not to mention the ups and downs) of investing in tough times like these.
I didn't have a whole lot to say.
Briefly I held forth on the Buddha-like nature of index fund investing, where you don't try to beat the market through some clever scheme but rather rest content with rising and falling in concert with the overall financial tide.
I told my friends, "If the world and national economy go to hell, so will our investments. If things improve, so will our portfolio. It's a humble way to invest, since you're happy to be average."
About all I do, other than embrace my average'ness, is try to keep our investments balanced fairly close to 50-50 between stocks and bonds/cash.
Right now they're at 56-44, which is close enough. (Aside from index funds, we own shares in an actively managed total return fund that aims for a 60-40 stock/bond split; since I have no control over what it does, I shoot for 50-50 with the index funds we own.)
Index investing has improved my life a lot. I used to worry when markets went down. Now I'm much more tranquil -- even without a Cheerful Cocktail.
There's a lot to like about having a "we're all in the same boat" philosophy of investing. To illustrate this, here's excerpts from a Morningstar X-Ray report on our investments I just printed out.
Asset Allocation: Your portfolio is moderately risky. Financial planners typically recommend this type of portfolio for investors who have three- to 10-year investment horizons and who are concerned by volatility and not preoccupied by it.
Stock Style Diversification: Your portfolio's stock exposure is spread evenly across the market and includes a good mix of small, medium, and large companies, as well as a fairly even mix of conservatively priced value stocks and high-flying growth stocks. For most investors, maintaining such broad-based market exposure is a prudent way to invest.
Stock Sector: You have a core portfolio. Compared with a benchmark with a similar investment style, you have very normal exposure to all market sectors.
World Regions: You have a fairly healthy stake in foreign stocks. Comparing your foreign exposure to a common international index, you have a pretty standard regional breakdown.
Fees & Expenses: The mutual funds in your portfolio tend to have very low expense ratios. This is good, because expense ratios have been shown to be a major factor in mutual-fund performance over the long term.
So there we are. These words aren't exciting, but they're just how I want our investments to be described.
"Moderate." "Spread evenly." "Good mix." "Prudent." "Very normal." "Pretty standard."
We're average. Happily average. How the U.S. and global markets go, is how we go. That's the beauty of index investing.
You trade feelings of being a genius, or an idiot, depending on how your active investing strategy is working out, for a peaceful Ces't la vie.