I’m happy using electricity without understanding it

We often hear that you shouldn’t invest in something you don’t understand.

And there is some truth in that.

You should do your own research. But how much research to do?

It’s probably less than you think. Perhaps less than you’ve done already?

That’s because you don’t need to understand everything about investing to do it effectively.

There are many things that I don’t understand. I don’t really understand electrons, particle physics or electrical engineering. But I can flick a switch and light up whole rooms in my house.  This uses something called electricity.  Or so I’ve been told. I’ve never actually seen this “electricity” myself.

The great thing about index funds is that we don’t need to understand their inner workings in order to use them safely.

Recently, I was explaining to someone why the prices of VWRL (a distributing fund that pays dividends) and VWRP (the same fund in accumulating form where dividends are automatically reinvested) were different by more than the retained dividends. I know…blah, blah, blah. Don’t sweat the small stuff.

You need to know that a global index fund is an easy way to own a slice of all of the big companies of the world. And you need to know that stock market prices are volatile so it’s probably best to buy and hold for the long term.

But once you understand that the stock market will fall by say 25-50% from time to time (e.g. Q1 2020) and that you should never sell in panic, you probably know enough to get started.

Could you lose everything? Again, think about electricity. Is it possible that I could electrocute myself? Well anything is possible. But is that something you spend a lot of time worrying about? Does it stop you turning the lights on?

Index trackers funds allow you to “piggy back” off all the knowledge, hard work and analysis of professional investors and analysts. They work hard so you don’t have to. Some companies will boom, some will go bust. But with a global tracker, we don’t need to worry about that. If it’s important, it’s included.

The stock market gathers information, reflects uncertainty, weighs up all the bets placed. From this it produces prices that reflect that information and uncertainty. In the jargon, the stockmarket is “efficient”. That means it reflects the available information and uncertainty well enough that you can’t beat the market by reading The News.

What about next quarters Eurozone GDP, purchasing managers survey or non-farm payrolls? It’s all jargon and it doesn’t matter. The stock market is a supercomputer and the news is already in the price.

I’m not an efficient markets absolutist either. I’ve seen plenty of market bubbles in my years in finance. Hell, I’ve seen plenty of bubbles in the last 6 weeks. I even think that some people can pick stocks and beat an index tracker. Maybe you’re one of them? (the odds are against it).

I probably don’t have to tell you that daytrading is for Frankies. I hopefully don’t have to tell you to clear expensive debts first and to have a cash emergency fund. Having said that it does no harm to remind people…as I may have mentioned before, repetition is a feature not a bug on this website.

It is one thing to know something intellectually and something else to know it in your heart. If you read something, you may think you understand it. But you only really understand something if you take action and follow through.

There are no billionaire librarians. You can’t learn love from a textbook. You can read as many books as you want on nutrition and exercise but reading won’t get you fit. Some things can’t just be learned intellectually.

If you’ve read all the blogs and are still struggling to get started then it’s not lack of information, it’s an emotional issue. Let’s be honest, you’re scared nervous. That’s normal! We all went through that at the start.

Asking for a guarantee before you start is not helpful. There are no guarantees. It takes a leap of faith and a huge change in mindset from obedient consumer who “knows their place” to owner of a piece of the global economy, investor and a free citizen.

The Internet is a wild frontier and it’s full of misinformation. Its easy to flit between Chatroom 1 where The Boyz are pumping Bitcoin, Dogecoin and Ethereum…to Chatroom 2 where Nervous Nellies swap tips about which bank account pays more interest and noobs warn other noobs to avoid that big bad stockmarket. Who can you trust?

For what it’s worth, I think we are somewhere near the top of the bull market that has run since March 2009. The problem is: that is not reliable information nor is it particularly useful. A stockmarket crash is always coming. The market will probably get cheaper in an interesting way.

Should you wait? For most people, it’s probably better to get started and get “off the mark” now with small amounts of money. Monthly $/£/€ cost averaging is your friend.

No one will be able to catch the exact top. And if you sold, when would you get back in? As someone smart once said: there are only 2 types of market timers: those that can’t do it and those that don’t know they can’t do it.

The better approach is to get started now. Get started with monopoly money (a practice account) then with small amounts of real money and build your confidence up via baby steps:

  • Open a practice account NOW and buy a global tracker fund with monopoly money
  • Sleep on it
  • Open a real account and buy say £100 worth of global tracker fund
  • Sleep on it
  • Add money, buy more global tracker fund in Month 2
  • Sleep on it
  • Repeat in Month 3
  • Sleep on it
  • Continue through falling (as well as rising) markets
  • Sleep soundly whilst your compounding machine whirrs away
  • Repeat until rich

9 comments

  1. Great sentiments but…

    What no referral links to freetrade?
    You may not understand electricity but your grasp of predatory blogging is even worse!

    1. yes, I’m glad you noticed that 👍

  2. I used to be a big fan of global index funds until I started to understand the threats posed by climate change and then looked at the weight of all those fossil fuel companies held in all these index funds…billions of dollars worth. I too don’t understand electricity but I like to think I understand the dangers associated with continuing to invest in fossil fuel companies.

  3. @ diy investor: There are a lot of “green” index funds out there, e.g. MSCI World Socially Responsible Index (SRI) or Dow Jones Sustainability Index World Enlarged. Among those sustainable funds are some differences regarding how they select the companies, so you can choose what is important for you.

  4. these are all great points especially when it comes to dollar cost averaging. even if a friend had a lump sum and was willing to jump right in with both feet i would caution them to wade into the pool.
    that comes with the caveat “DON’T FORGET TO DO IT CONSISTENTLY! BE A FINANCIAL LUMBERJACK” and not just the person who cuts down one tree.

    i’ve done really well the past 5 years buying individual stocks and i would say the same holds true about not needing to be an expert. just because i bought a chip-maker doesn’t mean i know how to fabricate a computer chip! if you ask me your behavior once you own some great companies will dictate success. buy and hold them and do not panic sell. it’s a long game with either an index or individual stocks. most people will do best with an index.

  5. @Nico, DIY Investor (http://diyinvestoruk.blogspot.com/) is a bit of a “watch what I do” when it comes to putting his money into action using what you’ve said and also his own more direct methods.

  6. Cornelious · · Reply

    Thank you very much for more well received content TEA.
    Question: how might the large amount of recent QE affect index investors? Thank you

  7. FI-FireFighter · · Reply

    Great post,
    Quick question (and I hope its not idiotic!), I know what VWRL is, I have funds going in there regularly.
    What is VWRP, I cannot find it?
    Thanks

  8. Hey, appreciate your ongoing posts, especially since a lot of the longer FIRE players seem to have slipped into largely ignoring their blogs.
    I just saw this youtube post and thought you and your readers might find it interesting. It ticked all my boxes.

    The Millionaire Next Doorhttps://www.youtube.com/watch?v=Hxi2JzI3dJc

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