3102: Why We Ignore The Stock Market And You Should Too: Demystifying Personal Finance Part 4 by Liz of FrugalWoods

[00:00:00] Have you ever noticed how a calm mind can really set the stage for a good night's sleep? That's the idea behind our new podcast, Good Sleep. Greg, our host from Optimal Relationships Daily, is here to help ease you into a peaceful night's rest with some positive affirmations. And these affirmations aren't just comforting. They can help ease anxiety and nurture positive thoughts, setting you up for true good sleep.

[00:00:25] So press play on Good Sleep Tonight, because a good tomorrow starts with a good night's sleep. Just search for Good Sleep in your podcast app and be sure to pick the one from Optimal Living Daily. This is Optimal Finance Daily, why we ignore the stock market and you should too. Demystifying Personal Finance by Liz of FrugalWoods.com

[00:00:52] Apparently, the stock market is doing terrible things right now. But I don't care. Monitoring the stock market like frugalwoods stock squirrels is a patently useless waste of time, energy, and brain capacity. Same for Frugal Hound as she's tethered to a leash and the squirrels are decidedly not. There's simply nothing to gain by it. I'm taking a different tact. I'm not going to tell you how to optimize your investments.

[00:01:21] Or beat the market. Or beat the market. Or pick that one hot fund. Why not? Because I don't know how to and neither does anyone else. No one can predict what the market will do. And there's no secret formula for beating it. What you can do.

[00:01:37] There are, however, two surefire ways to beef up your investment portfolio. Number one, increase your savings. And number two, increase your earnings. I realize this is ridiculously less sexy than playing day trader on your phone in your cubicle. But these are the only things that are 100% guaranteed to work.

[00:01:59] My approach to all things in life is to control what I can and to categorically ignore or let go of the things I can't. Let's be clear here. I'm not always successful at this. It's merely what I aspire to do. The stock market is firmly in the camp of things I can't control. And so I pay it no heed. No heed at all. I used to spend momentous amounts of time and effort trying to alter the course of events beyond my control,

[00:02:28] which worked a whopping 0% of the time. But in the genre of things you can impact, if you increase your rate of savings, say through some hardcore frugal action, then you'll have more money to invest. And if you increase your income, then you'll have more money to save. These, my friends, are the variables that you absolutely can control.

[00:02:50] Dips in the market, conversely, are entirely beyond our purview. Since investing is a scenario in which your gains are only as substantial as your inputs, focus your energy on increasing your inputs. While it might not sound thrilling to save extra dough just to plow it into the market, consider for a moment our dear old friend, compounding interest.

[00:03:15] Frugalhound, the magical compounding interest unicorn, is back again to remind us all of her awesome non-squirrel-catching related powers. Compound interest is interest added to the principle such that your interest earns interest. This is a sweet, sweet thing. Very simply, it's the function of money begetting more money. The more money you have invested and the longer it's invested for, the more money you'll make from your investments. Here's an incredibly impressive math equation for you.

[00:03:45] Money plus time invested equals more money. We've established I'm horrific at math, right? But even I can understand this one. Wondering where to start with setting aside more funds for your very own magical unicorn of compounding interest? Start by tracking your monthly spending and identifying where you can make cuts. I bet you a dollar you'll be able to find something you could frugalize further.

[00:04:11] Mr. Frugalwoods and I use personal capital for this task, which has the superb advantage of being both free and easy to use. Can't touch this stock. Also known as stay invested. This is another variable that you have almighty control over. The duration of your investments. The longer you stay in the market, the better off you'll be.

[00:04:34] Pulling in and out of the market when you feel the slightest twinge of panic is a great way to ensure you'll never make any money from your investments. Money has no emotion. It doesn't care if the market's up or down. Don't impose your human sentiments on it. Instead, trust in the long-range benefits of market returns. Mr. Frugalwoods and I bought our first stocks in 2008 as everyone else was fleeing the scene. And we've let them ride ever since.

[00:05:02] Additionally, a portion of every single one of our paychecks goes automatically into our investments. One of the keys to maintaining your sanity in the markets is to invest regularly and stay invested. You'll drive yourself nuts if you try to pick the perfect moment to start investing. Much like brushing your teeth every day. It's something you should do regularly and without fear or drama. Unless you have some sort of bizarrely dramatic oral hygiene routine.

[00:05:32] In order to reap those glorious unicorn benefits of compounding interest, you've got to have the time component of the equation on your side. Remember, money plus time invested equals more money. Investing is a long-term proposition. It's not something to track or speculate about on a daily or even yearly basis.

[00:05:55] Mr. Frugalwoods and I consider our investments to be part of our very long-range plans and have no intention of withdrawing them anytime soon. Note that this long-term approach is why you don't want to have your emergency fund invested. It's important to have that reserve of cash on hand in the event of an unforeseen demand on your funds. So while you want to funnel as much as you can into your investments, don't put every last cent in there.

[00:06:22] Conventional wisdom advises keeping at least three to six months worth of living expenses in cash. I lean towards six months because I'm a bit conservative, but many folks feel good with three months worth. How do we invest? In case you now have the burning question of how Mr. Frugalwoods and I invest, here's our quick and easy slash boring rundown. We have two portfolios of stocks, our taxable investment account and our 401ks.

[00:06:51] Our taxable account is fully invested in the low-fee total market index fund FSTVX. Our overall portfolio is weighted 90% total market index fund and 10% bonds, with the bonds being held in our 401ks in order to maximize tax efficiency. Both of our 401ks are in low-fee index funds, as we're staunch believers in avoiding fees whenever and wherever possible.

[00:07:19] Once a year, we spend five minutes rebalancing our portfolio to match our desired asset allocations. The most important aspect of managing stocks is to choose low-fee index funds, and then resist the urge to tweak, tinker, or otherwise do anything with them other than shovel in more money. And herein exists a fourth variable power over which you can exercise your all-encompassing power. Choose funds with low fees.

[00:07:48] This simple decision will save you epic amounts of cash over your investing lifetime. The Zen Art of Losing Money Is my portfolio down right now? Oh, most definitely. But I have enough other stuff to worry about in life, such as will baby spit up permanently stain our hardwood floors, because it's kind of looking like that right now. What the market is or is not doing doesn't rise to a level that causes me even mild heartburn.

[00:08:17] While some folks love to hate watching the market, I find that I prefer to ignore it entirely. Paying attention to it isn't going to make things better or easier. It's not going to increase the amount of money in my account, and I tend to think it would be bad for my health. You know, stress and all that. You'd be much better off focusing your energies on reducing your grocery budget.

[00:08:41] Now that's a vastly more achievable, tangible goal that will yield actual benefits. Concernating over the stock market, is akin to divining what goes on in frugal hound's brain. It's a futile endeavor, sure to leave you flummoxed and bereft. Turn your attention instead to more productive endeavors, like helping me figure out how to remove baby spit up from, well, everything.

[00:09:12] You just listened to the post titled, Why We Ignore the Stock Market, and You Should Too, Demystifying Personal Finance, by Liz of frugalwoods.com. And now, a word from our sponsors at Betterment. When investing your money starts to feel like a second job, Betterment steps in with a little work-life balance. They're an automated investing and savings app, which means they do the work. While they build and manage your portfolio,

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[00:11:36] The market recently had a 10% correction and I saw a ton of social media posts of people freaking out about how much money they lost. It was being described as a meltdown, a crash, a catastrophe. But I didn't see any of those things. What I saw were people expressing how they didn't expect the expected and natural volatility of the stock market. Remember this. You don't lose money until you sell.

[00:12:06] What you're seeing when you review the performance of your investments are unrealized losses. Just like when you see your portfolio going up. Those are unrealized gains until you sell. The message here is that you didn't lose money. Just hold on and stay the course. My friend Jeremy Schneider over at Personal Finance Club did a great post on this very subject where he showed a chart of the largest intra-year drops

[00:12:34] of the S&P 500 over 40 years. The average drop for each year over the last 40 years is 12%. Note, this doesn't mean that the market ended the year down that much. For example, in 2020, we experienced a 34% intra-year drop, but the market recovered and ended up over 16%. Despite the average intra-year drop being 12% over the last 40 years,

[00:13:05] the annualized return over that time period is a positive 11.5%. So anyone who held on during this time period, continued to invest, and didn't sell did just fine growing their wealth. Now what if you're already retired and you're actively drawing down from your portfolio? Your asset allocation and drawdown strategy should already be optimized to handle expected market corrections and crashes.

[00:13:34] We don't know when these corrections will happen, but we do know that they will at some point. So the key is to expect them and strategize accordingly. And that should do it for today. Have a happy rest of your day, and I'll see you on the Thursday show tomorrow where your optimal life awaits.