By Dr. Jim Dahle, WCI FounderInvesting is a critical life skill. It's actually not even that complicated. However, it is apparently very difficult for a large percentage of people. The main problem is that people don't do it. Investing, at its core, is deferring spending that you could do now so you can (hopefully) spend more later. While most people think they want to be a millionaire, what they actually want is to spend a million dollars. Those two things are polar opposites. You become a millionaire by NOT spending a million dollars you could have spent.
Wealth Is Not Income
OK, you've decided you want to be rich. You want it “real bad.” In fact, you want it so badly that you're willing to NOT spend money right now that you could spend and you're actually going to invest it so you can spend it later. Congratulations! You've taken the first step to becoming rich. Lots of people think rich people just make a lot of money. While it's true that many rich people make a lot of money, it's also true that:
- Many rich people only USED to make a lot of money,
- Quite a few rich people hardly make any money at all, and
- A fair number of rich people never made all that much money.
The main concept to understand here is that while having wealth and having a high income at some point in life are two highly correlated activities, they are not the same thing. Wealth is not income. Income is what you make in a given year. Wealth is what you have—whether you earned it or whether it was given to you. The best measure of wealth is net worth: everything you own minus everything you owe. If you're going to track just one financial number in your life, track this one (not your credit score).
More information here:
The Nuts and Bolts of Investing
What to Invest In
Now, the easy part. What should you invest in? Stocks? Bonds? Rental properties? Bitcoin? There are gazillions of investments out there. However, you don't actually have to invest in any one of them and certainly not all of them to be successful.
Perhaps the greatest place—and certainly one of the easiest—to invest your money is in the most profitable corporations in the history of the world. When someone starts a really successful company that makes lots of money, they'd eventually rather have a big lump sum of cash than own the company. If the company is really big, nobody can really afford to buy it from the owner by themselves. So, the owner of the company doesn't sell it to just one person; they sell it to everybody. That's called an Initial Public Offering, or IPO.
After an IPO, shares of these big successful companies that make lots of money trade on the stock markets of the world. When you own shares of these companies, you share in their profits. It turns out that people have studied the best way to invest in these corporations. That method is called “index funds,” which are mutual funds (groups of investors who have pooled their money together and hired a professional manager to invest their money) that just buy all of the stocks. They buy the best ones and the worst ones and all the ones in between. As silly as it may sound, it turns out that it is so hard to just buy the good ones that you're actually better off buying all of them.
Conveniently, these index funds are available in all kinds of different types of investing accounts like a “brokerage account” (that anyone can open and use for anything), a 401(k) (a type of retirement account offered by an employer to its employees), a Roth IRA (a type of retirement account that anyone who earns money can open without an employer), 529 accounts (a special type of account for college savings), or a Health Savings Account (a special type of investing account for money that is set aside to pay for healthcare).
It turns out there are a lot of index funds out there. Most of them aren't that good, but there are a few dozen that are. If you're having trouble identifying the good ones, maybe just start with one or both of these:
- Vanguard Total Stock Market Index Fund (VTSAX)
- Vanguard Total International Stock Market Index Fund (VTIAX)
More information here:
How to Build an Investment Portfolio for Long-Term Success
150 Portfolios Better Than Yours
When to Invest
When I first started writing about investing, I didn't realize how hard this was for people to understand. It is really hard for people to invest at the right time. I'm going to tell you when to invest so the mystery goes away. Ready? OK, here we go.
Invest now. Now. Again. Now. Now. Do it now. Now.
Whenever you wonder when you should invest, remember that advice. Do it now. Don't pay any attention to those voices in the back of your head screaming at you. Don't pay any attention to the voices on TV and in investing magazines and on websites. If they're not saying “invest now,” they're wrong. Actually, there is a better time to invest than now. Ten years ago would have been better. But that time is no longer available to you, so go ahead and do it now.
Did you get paid this month? Then, invest this month. Did you get an inheritance this month? Go ahead and invest that. Did you just sell something? Did you just roll over a retirement account? Go ahead and get the money invested. Right now.
But What If the Market Goes Down Right After I Invest?
Oh, it will. Actually, about one-third of the time, it will go down right after you invest. Sorry. That's part of investing. As the investor, it's your job to lose money (temporarily) every now and then. I know you think you should somehow have the ability to identify in advance when the market is going to go down, but you actually can't. Neither can anyone else. Don't believe me? Start keeping a journal of your own (and other people's) predictions about the future. It likely won't take long before you realize all crystal balls are cloudy, including yours.
Still don't believe me? Let's try an exercise. Which of the following instances would be a good time to invest? These are charts showing the overall level of the stock market:
Yes? No? Not sure? How about this one:
That sure doesn't look like it's going in the right direction, does it? It's even worse than the one above it. Or is it about to turn around and go back up? So hard to tell.
Oh, this one looks bad. Who wants to invest at all-time highs? Not me, that's for sure. That market must be about to decline, right?
See, that's what happens after all-time highs; it goes back down. But is it done going down? Aarrgh, so hard to tell.
What about this one? Up? Down? What comes next? Wouldn't want to invest at an all-time high, would you? Or would you?
Oh, this one is way down low. That surely must be a good time to invest, right? Or maybe it's going to keep going down. I'm just not sure. I guess I won't invest.
Another all-time high. It's probably better to avoid investing.
As you have probably deduced by now, these are all small segments of the same chart. Want to see the whole thing? Here you go.
It's just a 125-year chart of the US stock market. I want you to notice how small those little downturns look when viewed over the course of a century. Viewed from afar, even the Great Depression of the 1930s, the stagflation of the 1970s, and the Global Financial Crisis of 2008 seem forgettable.
I want you to also notice how frequently the market was at “all-time highs.” Heck, the S&P 500 had something like 50 “all-time highs” in 2024. This is why the best time to invest is now (assuming you have no functioning time machine). Yes, there's a decent chance the market will go down before it goes back up again. So what? You're not investing this money for next week or even next year. This is money you won't spend for 10, 20, or maybe 50 more years.
More information here:
What to Do After You Invest
OK, you've invested. You dumped that $2,000 you carved out of last month's income into some index fund from Vanguard. Now what? Should you go back and look at what it is worth every day? Should you tune in to CNBC to see what happened? Nope. You should just get ready to do the same thing again next month.
I started investing in 2004. Here are all the months I have invested money in since then:
- January
- February
- March
- April
- May
- June
- July
- August
- September
- October
- November
- December
Here are all the years I've invested in since then:
- 2004
- 2005
- 2006
- 2007
- 2008
- 2009
- 2010
- 2011
- 2012
- 2013
- 2014
- 2015
- 2016
- 2017
- 2018
- 2019
- 2020
- 2021
- 2022
- 2023
- 2024
If you multiply those two by each other, you'll see I've invested money about 250 times. That's 250 times I put money into the market, not knowing if the market was going to go up or down. Sometimes, it was July 2008, and the market went down afterward. Sometimes, it was March 2009, and the market went up afterward. Sometimes, it was February 2020, and the market went down and then rapidly back up. Sometimes, it was July 2022 and the market went up and then rapidly back down. But over the last couple of decades, my persistent efforts have been rewarded:
See how today's value is higher than all of the values in all (or depending on the month almost all) of the months that I invested in previously? Those charts don't even include the dividends these stocks have paid me every quarter or so. That's happened about 84 times so far.
After you invest for the month, you go fill your life with all of those things that life is full of—work, play, recreation, family, adventure, travel, heartache, whatever. Then next month, when you have money again, you do that thing that rich people do. You invest.
What do you think? Why do we make investing so complicated when it can be so simple? Why do so few people, even white coat investors, understand and follow the simple principles in this blog post? Why is it so hard to stay the course?
This is classic, simple, timeless advice. I didn’t follow this all exactly, but I came out ahead whenever I did follow it.
The regular monthly investing takes advantage of DCA. Dollar cost averaging allows you to pay a lower than average price.
It also forces you to buy more shares after a decline which would otherwise be emotionally difficult for many.
It might be splitting hairs, but I don’t think JD was necessarily advocating for dollar cost averaging in this post. He was simply investing money likely when he got paid. It turns out he had money each money. As soon as he had it, he invested it. That’s VERY different than if he had a lump sum of money, and strategically decided to invest it month by month. In fact, one could surmise that JD is saying the OPPOSITE of dollar cost averaging. Invest now. When? Now. Right now. Not DCA.
Agreed.
Yea, as discussed here:
https://www.whitecoatinvestor.com/dollar-cost-averaging-is-for-wimps/
You can’t DCA unless lump summing is an option. But lots of people (in my opinion mistakenly) use the term DCA when they mean periodic investing. Both have the effect of buying more shares at lower prices over time but periodic investing has the benefit of avoiding cash drag. It’s basically lump summing every time you have money, but for most of us that’s once a month or so.
Yeah we used to just call that dollar cost averaging back in the 90s, this idea of DCA requiring a lump sum is Johnny come lately and in my view obscures the simple mathematics that periodic investing automatically produces dollar cost averaging… Great article though, I was having this chat with a nephew over Christmas and will send it on.
It’s okay to split hairs. Posting at 5:30 AM after NYE isn’t a great idea in retrospect. I tried to say this is a great article, but maybe I shouldn’t have brought in DCA. But I’m still not sure it was wrong to do so. I think the term has been used variously over time. This is what I was thinking:
Per Investopedia – “Investing can be challenging. Even experienced investors who try to time the market to buy at the most opportune moments can come up short. Dollar-cost averaging is a strategy that can make it easier to deal with uncertain markets by making purchases automatic. It also supports an investor’s effort to invest regularly.
Dollar-cost averaging involves investing the same amount of money in a target security at regular intervals over a certain period of time, regardless of price. By using dollar-cost averaging, investors may lower their average cost per share and reduce the impact of volatility on their portfolios.”
Ben Graham (in the Intelligent Investor) seemed to advocate periodic investing for the “defensive investor” and described DCA as a type of “Formula Investing” to avoid market timing.
The U.S. Securities and Exchange Commission (SEC) explans: “Dollar-cost averaging involves investing a fixed amount of money at regular intervals, regardless of the share price. It’s a long-term investment strategy designed to reduce the impact of market volatility.”
Whatever you call it – investing regularly is the way to go. When prices are low, you buy more shares. When prices are high you buy fewer shares. Automating this prevents our behavior from making things worse.
We did this twice per month from 1999-2010 into 3 funds in our taxable account. I thought I was being smart by not letting money sit in checking account, investing in a diversified portfolio and reducing volatility of the purchases. 25 years later, I wish I had invested monthly or quarterly since there are so many tax lots (31 per fund per year). Made it more challenging to tax loss harvest years ago before they all became too far in the money (not complaining) and now, when making charitable donations or contributing to donor advised fund. Simplicity now is more of a priority. Also, deciding whether to reinvest dividends and capital gains distributions (simple) vs receive in sweep account for lump sum investment (fewer tax lots) is a lower order consideration. Just doing it, is first order priority.
As always nice to read your articles. I have been there and done that at age 82 I took the advice of one of your friends and quit playing the game and now sit in bonds and CDs . Not the smartest I know but I never made that great of income but I have enough for myself and family to live on if I don’t lose it.
Have a HAPPY NEW YEAR and keep up your wonderful work.
Happily retired DDS
I just have a small portion automatically invest in spx fund every pay check but I think that can now be automated through fidelity as well.
You provide a lot of helpful information to people visiting your site. It would benefit everyone to know more about basic economic principles and how the US inflationary banking system drives stock market performance at the expense of the general population. Despite the abundance of information available, nobody is able to come to sensible conclusions about what is correct or incorrect, creating endless debates. I’m not selling anything. I’m only wanting to create awareness and alert honest people to the problem. Your platform could be an excellent conduit for that. If you have less than 30 minutes to read what you find at this link, I think you’ll do further research. I don’t want attention of acknowledgement. I just want to alert honest people to the problem.
[URL removed and poster’s IP placed on list for comments to be held prior to publication after posting URLs repeatedly on the blog. If you want to advertise here, buy an ad.]
As a self-taught chartist (with selected courses on wizardry and mysticism from the University of Phoenix Online), I can absolutely tell you that you should never invest after the double Henpecked Hal while it’s inverted. That’s all I can truly reveal without paying $12,000 a year for my divinations…I mean chart reads.
Saving this for my children once they’re old enough to understand.
I’m making mine read it too!
Very nice post. As someone in his third year of retirement, I take a bit of pride in apparently being in the select group of investors who did it right.
Of course this was after having to learn the hard way early on— such as taking some wrong, well meaning investing advice from an uncle. Also a real estate deal that was supposed to not lose, but somehow it did, and spectacularly. Funny how that works.
But these mistakes pointed me in the right direction. WCI and MMM have talked about not “sucking” at money as being some kind of superpower. I’m no intellectual, but I’m glad I had enough intelligence to eventually systematically stick to a plan that worked out very well.
—In writing the above, it makes me wonder how many are in a super select group of people who did not make any big mistakes along the way.
$1000 every month invested since 2002 for my wife and I and now deciding whether to semi-retire at 55 or not. We both like our jobs though but just the fact that we COULD semi-retire is what physicians need to aim for. Yes, we’ve had other investments along the way (and mistakes) but this is our foundation.
The most important thing- we told our advisor from day 1 that after automatically deducting any money going to savings and an emergency fund, we’d spend the rest guilt free and we have.
If you believe in the automated slow and steady approach, pass it on. Our residency has a monthly financial literacy lecture, ie 12 hours per year, and this seems to be more meaningful to our future generation of physicians than anything else we’ve done. Yes, they’re learning medicine but if you can find just ONE person that will heed the above financial advice, you’re going to change their life.
Great article WCI.
Finally have stable practice . Essentially just starting down investment road with plans to practice 10 + more years. Help!
Good stuff but maybe change the title – “That thing rich people do” is somebody else’s line and I did not see this referenced anywhere on this post here (https://www.amazon.com/That-Thing-Rich-People-Investors/dp/0979224888)
Interesting.Haven’t read it. Seems a challenging trademark to defend. Doubt they’ll even try.
Don’t think they would – I was just pointing it out for a courtesy rethink of the title for respect but also to clarify that you did not take stuff from them. I am sure there was no bad intentions so thought to point it out. no big deal
Maybe I should read the book. It isn’t new. I’m not sure where that phrase entered my head from. But when I Google it, all I find is the book. So maybe that was the origin. It’s a catchy phrase anyway.
Yeah, haven’t read it myself, ordered it for my daughter as she’s starting her career. I’ll scan it and see what she says about it.