Tag: dollar cost averaging

“If every instinct you have is wrong, then the opposite would have to be right”

One of my favorite Seinfeld episodes is called “The Opposite.” In it, George (the perpetually unsuccessful main character) realizes that every decision he has ever made has been wrong, and that his life is the exact opposite of what he wanted it to be. His successful friend Jerry convinces him that if every instinct he has is wrong, then the opposite would have to be right. That feels pretty logical and George goes on to experiment with doing the complete opposite of what he would do normally. I won’t tell you what happens so as not to spoil it for you, but the basic concept from my favorite sitcom applies to investing.

The average investor tends to buy stocks when they are going up in price and tends to panic and sell when they fall. That is a very natural human behavior. However, it is not what leads to wealth creation. In fact, this basic behavior is probably what holds back most people who are actually on the right track (after all, not everyone even decides to save money to invest). There is a lot of literature on this but basically, the reason this holds people back is they tend to buy stocks when they are relatively high and sell when they are relatively low.

While the opposite strategy would be optimal, nobody can perfectly predict the highs and the lows. That’s why I tend to invest all the time (there has not been a month when I didn’t invest in at least 12 years but more likely in about 20 years). It’s not because I am so privileged that I can do this. I’ve invested various amounts, sometimes only a few hundred dollars in a 401k. It’s all about the discipline that helps me ultimately get the average price through time (not relatively low or high). I’ve written about dollar cost averaging in past posts (for example, here).

But this post is not about dollar cost averaging. I held back against my instinct to invest everything I had during the stock market party of 2021. Instead, I continued dollar cost averaging some money every month and holding some cash on the sidelines. I held off some cash so I can do the opposite of most people’s instincts. Most people sell during the “selloff,” when the market seems to be in free fall with the looming recession, Federal Reserve is steadily increasing the interest rate, and a major war is happening in Europe. I won’t perfectly find the bottom and I am not trying to. I’ve just increased the size of my monthly investments to make sure I get more of the “discounted” prices. I am still dollar cost averaging, but I am doing more to bring down the average.

For me, this is the time to put more of my cash to work. Like Warren Buffett, I expect to be a net buyer of stocks over the course of my life, which means I plan to buy more than sell. That means, I generally like it when stocks experience declines in price in the same way a shopper likes to shop during holiday promotions. As Mr. Buffett would also say, the world has gone through many selloffs and all kinds of calamities, but the stock market continues to grow when you zoom out far enough.

It’s a scary time for sure and I will most likely continue to see my portfolio go down in value. But 5-10 years from now and maybe even sooner, I will be glad I followed Jerry’s advice to “do the opposite.”

Here is a clip from that Seinfeld episode for further inspiration and a laugh.

It’s never too early to start building wealth

The earlier you start, the better off you’ll be. This applies to many things in life, and certainly to personal finance. Here are some specific steps you can take:

  1. Whether it’s your first paycheck or the first time you get money for your birthday, put some of it away into a brokerage account. A simple savings account is better than buying stuff, but you are much better off investing in stocks. The $100 you invest early in your life will do a lot more work for you than the same amount of money later in your life through this amazing thing called compounding (like a snowball, your money will grow faster and faster because it will keep adding to the base).
  2. Set up an automated way for you to invest. I put money away towards investing every month automatically, and so should you. This will protect you from yourself and from human nature. The future you will really thank you for it. One of the coolest things about investing regularly is that it lets you dollar cost average (essentially, if a stock price for a given investment goes down, you are able to buy more of it with the same $100 and less of it if the price goes up).
  3. Stocks is probably the asset class that will give you the highest return, so I recommend putting whatever you can allocate to investing to stocks. I think it’s fine to spend a little money on individual stocks of companies you know and in which you see potential. However, I recommend you invest in index funds (these funds simply track a number of companies). Key reasons why I like index funds are: a) they give you an easy way to diversify your risk across many companies, b) they are inexpensive because they are not actively managed.
  4. Vanguard is my favorite brokerage company. John Bogle, who founded the company, is one of my heroes. He invented the concept of index funds and set up his company in such a way that really benefits investors with low costs and simplicity. Check out the index fund VTSAX (Vanguard Total Stock Market Index Fund). This fund basically covers the full United States stock market.
  5. Consume content from which you can learn about personal finance (books, blogs, videos), especially from people who know what they are talking about: Warren Buffett, John Bogle, Napoleon Hill, JL Collins.
  6. Invest your time wisely. You will spend most of your time in your job/career, so make sure that it’s something you love doing. Financially, if you pursue the business field like I did, strive to not just work for a paycheck. You can do this by either owning your own business or by working in companies, which give you stock as part of the compensation package. I have done the latter and have seen a significant return on my investment of time in the companies where I’ve worked.

Key takeaways and actions:

Always put away some portion of your income and do it regularly, ideally into a Vanguard index fund, such as VTSAX. Be a sponge and learn everything you can about personal finance. Be very strategic about your job and lean towards having ownership of the company stock.