I’m now entering my 6th year of investing in personal pensions using pension accounts (Pension Savings Fund, IRP, ISA accounts). Through many trials and errors, I have established a long-term investment system and developed my own mindset as a long-term investor. In this post, I want to share some thoughts on the factors to be cautious of while investing long-term and how I came to establish the mindset necessary for it. Many of the ideas in this post closely match the contents of the book “The Simple Path to Wealth” by JL Collins. If you’re interested, you can read the book, or if not, just reading the summaries on Reddit should be enough. I was amazed at how much it all resonated with me.
1. You need to let go of the thought and desire to outperform the market.
First, let me quote one of the summaries of “The Simple Path to Wealth” found on Reddit. Many people don’t like index investing for the following reasons:
Many people still don’t like to index.. why?
o It is difficult for smart people to accept that they can’t outperform the index. o It means you are accepting the market “average” return.
o The financial media is full of stories of people who outperformed the index for a few years.
o Over periods of 15-30 years though, 82-99% of the indexes will win.
o People underestimate the fees they pay to managers.
o People want exciting, quick results and bragging rights. Buying an index and holding long term isn’t exciting. Get your excitement someplace else.
o There is a huge business selling advice and doing trades to people who can be persuaded to believe they can outperform.
When we think about investing (=how I used to think…), it’s typical to expect double-digit annual returns without having a well-done company & market analysis. However, such returns never happen, even if the company & market analysis is assumed to be perfect. Even investments by smart institutions mostly underperform compared to index investing in the long run. Warren Buffet also mentioned that individuals don’t have the ability to pick individual company stocks, and he even said to his wife that he would leave her a portfolio consisting of 90% S&P 500 and 10% bonds. Even though investing steadily in the market for a long time has been proven to be a successful investment strategy, why is it difficult to accept that you can’t outperform the market? Where does the desire to outperform the market come from?
1) FOMO (Fear of Missing Out)
I think the biggest reason is the fear of missing out. When we start evaluating others’ standards rather than our own and hear many stories from our surroundings or the media about who earned how much and whose investments were successful, it’s natural to feel anxious. Then, unknowingly, we start to reach for risky investments, and when we do, accepting the market return becomes extremely difficult. Investing activities are separated into the field of management/economics, but in reality, the more I think about it, the more closely related it seems to be to humanities/philosophy/psychology.
2) Desire to become wealthy quickly
Similar to the above, I think it’s difficult to accept the market return because of the desire to become wealthy immediately, rather than after retirement. Because accepting the market return means giving up on becoming wealthy immediately. We weren’t born into a wealthy family, and we can’t avoid spending physical time accumulating wealth. We need to accumulate seed money through labor and accumulate wealth through steady investment activities and preserve the accumulated wealth well. Although the timeframe may vary depending on individual goals, for an average office worker, it will take about 15-30 years. It’s not easy to have the patience to postpone current pleasures and satisfactions for 15-30 years.
In conclusion, I think we need to have the mindset that we need to accumulate wealth slowly by acknowledging the market return. It took me a long time to admit this and make progress. It’s not easy to give up the desire to buy a nice house and car, and spend freely, and instead invest long-term for retirement. And in recent years, seeing people easily make and spend money through coin trading, I have also had doubts about whether what I am doing is really right. Nevertheless, I think I had to believe that what I was doing was right and continue to execute it steadily.
Investment books by gurus were very helpful in giving me peace of mind. By regularly reading books by Buffet, Graham, Lynch, Costolani, Bogle, Siegel, Bernstein, etc., I was able to suppress the desires and impulses that were deeply ingrained in my mind. If you do it for a long time, you’ll stop looking at your balance so often and become so indifferent to the market that your mind becomes comfortable. Just as I thought that investment activities are closely related to humanities/philosophy/psychology, listening to and reading stories from gurus in our society also helps me to feel a lot and find psychological stability. Moreover, devoting time to self-improvement is very helpful in eliminating investment distractions. Warren Buffet said something like this at the Berkshire Hathaway shareholders’ meeting (if you search YouTube, you’ll find interviews or conversations where he says the same thing over and over again).
“The best investment is an investment in yourself, and what you invest in yourself is not lost or gone. The biggest asset among assets is yourself. It is not affected by inflation, and no one can take away your abilities. So be good at something.”
Isn’t that so true? Although he mostly talked about career-related aspects, if you invest time in self-improvement in various aspects, you can upgrade your assets quantitatively or qualitatively. I also invest about 3-10% of my income to learn new things, study, and develop hobbies, which helps me to block out other thoughts.
2. You must recognize the fact that even experts can be wrong.
I worked in the company’s planning team for about a year and a half in the past. One of my roles was investment operations, and I was responsible for effectively managing the company’s retained earnings to generate non-operating income and reinvesting them in the core business to continuously secure competitiveness within the industry. The company, which had been in business for about 40 years, had accumulated retained earnings of around $400-500m since the 1980s, and I was in charge of managing these funds. Investments were made in various assets such as deposits, bonds, equity-type assets, unlisted stocks, and private equity funds, and the annual target rate of return was set, with performance evaluated monthly.
In July 2020, I was transferred to this team. I had checked the investment portfolio and learned that most of the assets were invested in deposit and bond-type funds because the company was conservative. At that time, the deposit interest rate was barely 1% per year, and it had been about 4-5 years since the investment in bond funds, but the average annual return was in the 1-2% range, which was very low. In the latter half of 2020, the market was in a state of high liquidity due to the COVID-19, and I suggested to management that we sell the bond funds and move the assets into equity-type assets. This suggestion was accepted thankfully. Since the company doesn’t directly invest in stocks, I requested several institutions to offer the funds or how you would run.
Over the next 2-3 weeks, we received pitches from various institutions and funds. Fund managers, sales, research teams, etc., all came together and provided neat summaries of domestic and international macroeconomics, industry analysis, overall fund management strategies, top picks, target returns, etc. When I listened to them, it seemed like we would achieve high returns, and I thought there were really a lot of smart people in the world. Since we couldn’t accept all the institutions, we selected a few and decided to track the performance of each institution. By the end of 2020, we had made double-digit returns just by selling the company’s bond-type assets and moving them into equity-type assets as the liquidity reached its peak. Looking back, every day was so much fun because it was unrealized gain but that was quite a few million dollar.
Then, 2021 came, and even though it was still a time of high liquidity, I remember that the market conditions became challenging from the second half of the year. The return rates from the funds we invested in were like a roller coaster, and some funds even recorded negative returns. While the overall company return rate was good, I requested feedback to a institution on the poor performance. In response, I often heard apologies and that it would take some time to turn things around. Or that it was a good opportunity to invest more now and reduce the average purchase price.
Through these experiences, I became convinced that the market is an unpredictable entity. Even though industry experts analyze and devise strategies, someone will always be wrong. It doesn’t mean that their abilities are lacking, but rather that no one can be sure about the market, so naturally, mistakes will be made. Short-term predictions may be accurate most of the time, but I think it’s too difficult to consistently make long-term predictions without making mistakes. So, in the same vein, active funds seem to be incapable of beating index funds in the long run. This is also the idea presented in “The Simple Path to Wealth”.
Why most people lose money in the market
o They think they can time it – they can’t
o They believe they can pick individual stocks – they can’t
o They believe they can pick the right mutual fund managers – they can’t
o You can’t time the market, so don’t even try
Ultimately, it reminds us that investing in indexes for the long term is the best choice. We must acknowledge that as long-term investors, it’s difficult to beat the market, and we must always keep in mind that investing blindly in pension savings funds or tax-benefit accounts is the best option. It seems that becoming wealthy slowly, rather than waiting for someone else’s time, is the way to go.
As a side note, among various investment instruments, I like stocks the most. When I think about the reasons for this, I wonder if there is any other assets besides companies and organizations that has the tenacity to survive and grow compared to other investment instruments. After coming to the U.S., I realized that the labor flexibility here is so free. When things are good, everyone is happy, but at the slightest sign of difficulty, there are immediate layoffs and cost reductions, and they do whatever they can to squeeze and stabilize. Through such periodic activities, they improve their structure and find other ways to eat, growing at a rate of 8-10% annually. Among them, it seems that the U.S. is the best in terms of market aspects. In terms of financial scale, it’s number one, it’s a black hole for world talent, it improves costs through efficiency, and there is steady inflation, so I don’t think it will be easy to find a better investment market than the U.S. in the future.