With the recent downturn in various financial markets, another cliche suggestion has turned up, namely that you should buy these investments because they are “on sale”. There is a certain logic to this: if an investment is a good investment, it’s generally better to buy it at $30 than at $60, since this gives it more room for growth, and you can potentially earn a higher reward. So during a recession, or even a simple downturn, people trying to be savvy with their money will often see this as an opportunity to buy.
But is it really? First of all, you never really known when the “best sale” is going to be in effect, meaning you don’t know how far down the value will go in a recession. This is known as trying to catch a falling knife. If you can actually predict where the bottom is and you have spare cash to invest at that time, then sure, you could make a pretty good return if and when the market rebounds. But as I keep saying, nobody can truly predict the future, so while you might get lucky, you also might not.
I’m human, too. When I heard that Disney stock had been on a slide for some time, the thought popped into my head, “Gee, maybe I should buy a few Disney stocks just in case!” But so what? You might get a one-time 20% return on $1,000 on the rebound or something like that, but then what? And what happens if it doesn’t go up, but actually keeps going down, then spends the next 5 years hovering in place? Again, if you’re going to own the stock, you may as well pay less for it than more, but what really matters, for you, is how much it rises over time, not whether it’s cheap or not. There are plenty of penny stocks that never go anywhere.
Now, individual stocks or assets are different than groups. History has proven time and again that we rebound from low markets and values increase. So maybe you’re into the FIRE movement and you’re all about that VTSAX, as I mentioned last post, so you decided, gee, VTSAX is on sale right now, I should buy some more! You might be right, since with index funds, you’re investing in the broader market and not an individual stock. When you buy into the broader market, you are plugging yourself into the model of historical returns, which is great. But at the same time, how much money are you planning to put into the market over the course of the downturn? How long is the downturn going to last? If we’re only talking about hundreds of dollars over several years, that seems like a relatively small reward for all the effort. If thousands, I guess that might make a difference. If tens of thousands, dang, you must be ploughing money into the market, but where in the heck did you get that money in the first place? Were you just not investing anything beforehand? I sure hope you didn’t wait until a “downturn” to START investing, because there is no shortage of analyses showing how bad of a strategy that is. Remember, broad markets come with a smaller annual reward on average, but the power is in the compounding over longer periods of time because of consistency. Is your 1.5 year downturn investment really going to make a huge difference as part of the general returns over 20 years?
See, this whole idea of investing now just because everything is “on sale” is just the same sort of magical bullshit thinking that is employed in get-rich-quick schemes. It took me awhile to realize this. It’s this fanciful thinking that everything now is an opportunity, so scrounge up those dollars while you can! (“Buy now and SAVE! But don’t wait, this opportunity expires SOON!”)
I get it, I really do get it. Being unemployed right now, I sometimes think, “Dang, I wish I was still working so I could be putting money into the markets and benefiting from the low prices”. But then I realize how absurd that sounds: “I wish I was still working”. No. No, no, no. This is my year off. I wish for nothing other than the current state of this continuing to be my year off. Because honestly, I don’t know what ultimate return I could hope to get from, say, maxing out a 401k this year. First of all, the money I would have invested earlier this year before these big drops would not be any advantage to me (since I would have paid higher prices), and later in the year, for all we know, markets could go back up. It’s entirely possible we only experience low prices over 3-6 months, and over the $19,500 or so dollars you can sock into a 401k each year, that accounts for just less than $10,000 to put into stocks at a discount over 6 months. Even a $3,000 extra return on rebound is nothing to sneeze at, but this is only if things go right, so we aren’t even talking about the cost of the risk things go lower. Maybe it’s my bias as a software developer, but I don’t feel that $3,000 is a tremendous amount of money for that kind of risk, or at least not enough to bribe me to have not decided to take this year off. I’m so incredibly thankful that I chose to do this, and that I spent those 3 weeks trekking in Nepal.
So yeah, as I mentioned, when I really think about it, it just strikes me as magical bullshit thinking to put too much emphasis on things “being on sale”.
In general, I just care so much less about investing these days. I still definitely desire to reach financial independence, starting with my $300,000 goal, and I do still prefer index funds, but I just don’t care to worry about the fine details these days. Besides, I keep wasting money on stupid, unhealthy crap from convenience stores, and it never escapes me that I could actually save a significant amount of money (and, potentially, weight) by cutting this out from my life.
We’d all love to wake up rich someday, I’m sure, but I dunno, I still think slow and steady is the best way to do things, considering the low odds of success any other way. It’s not that you can’t get lucky and fantastically rich, it’s just that the chance of this happening is tremendously low, and the potential downsides quite high. Not working right now is pretty fantastic, and my life is generally more important to me than the potential gains on my Vanguard balance.