What A Lost Cell Phone Can Teach Us About Investing

February 25, 2015

Earlier this year, my boss shared with us her story of how she dropped her phone behind her bed. Her first thought since the bed was basically against the wall was to move the bed…in her words “bad idea.” After some time (and a little pain medicine), she took a second approach: use a hanger from the side to pull it out….again, “No dice.” (She thinks she actually made it worse by pushing it further out of reach.)

Exasperated, she comes up with a third idea: “go vertical and actually use my short arms to grab it.”  The result? It worked. The point is this: sometimes the easiest solution is actually the one that works the best (and won’t break your back).

When it comes to investing, we often make the same mistakes. We think that in order to be successful it takes some sort of alchemy mixed with special knowledge and a little bit of luck. This couldn’t be further from the truth. While there may be certain tricks and techniques that occasionally work, very seldom do those tricks and techniques work consistently over time. Instead, here is a better way to invest.

#1 Invest according to your goals.

Like Steven Covey’s “Seven Habits of Highly Effective People,” you always want to begin with the end in mind. What is it exactly that you are investing for? How much do you need, and when do you need it?

No matter what it is, if you want to achieve it within the next few years you probably don’t want to put it in the stock market. (The stock market—as represented by the S&P 500—has had positive returns over 12 month periods about 70% of the time, which means it’s had negative returns about 30% of the time, and knowing Murphy’s Law, it’ll probably be a negative year the 12 months right before you need it.)

#2 Save regularly.

If there is one thing you can be sure of in the stock market, it’s that it will either be higher or lower tomorrow than it is today, and since we don’t know which direction it is going, it doesn’t make a whole lot of sense to throw a bunch of money into it all at once and hope we’re right. Instead, plan on making regular investments into the market (i.e., dollar cost averaging). That way, if the market happens to go down you are able to buy more shares of your investment at a lower price. If the market goes up, well that’s okay too because some of your money is already invested.

#3 Invest for long periods of time.

Remember when I said you probably don’t want to invest in the stock market when your goal is just a few years away? Well, by the same token, when your goal IS a long way off (ten or more years is a good rule of thumb), the stock market may be a more appropriate place to invest. Historically speaking, investing in the stock market for at least 10 years has produced a positive return about 95% of the time, and if it was held for 20 years, it produced a positive return 100% of the time. Now we know that past performance is no guarantee of what will happen in the future, but so far it’s been pretty reliable. Since 1928, the stock market has averaged about 10%—inflation has only averaged 3%.

Here’s the bottom line: many people have come up with creative ways to choose investments, but sometimes the easiest (and simplest) way is the best.  In fact, many retirement plans now offer target date funds that make it as easy as just picking the fund with a target date closest to your planned retirement date. This is a great way of making a regular investment in what for many is their greatest long-term goal: enjoying a comfortable retirement—and you won’t break your back doing it.