Investing is hard. In fact, it is so hard that the combination of a decent income, financial literacy, and financial discipline is so rare that it effectively functions as a superpower. Today we're going to talk about twelve reasons why investing is so difficult.
# 1 You Need to Have Something to Invest
Inexperienced investors focus on the investment, while those in the know focus on having something to invest. Having something to invest requires three things:
- A reasonable income
- The discipline to not spend your entire income
- Avoiding loss of earnings/capital through divorce, death, disability, liability, and speculative investments
You're going to need a fair amount of each of those things to be successful, although you can often make up for a low amount of one of them with an extreme amount of another.
# 2 Wall Street is Out To Get Us
By Wall Street, I refer to the financial services industry. This can include bankers, insurance agents, stock brokers, attorneys, accountants, investment managers, financial planners, and advisors of all types. At the end of the day, these professions exist to transfer money out of your investments and into their investments. That's not to say there are never times when they add more value than they cost. But in investing, you get what you don't pay for. The less you pay in fees, the more you have and can use to save, invest, and later spend. The successful investor is very fee-conscious. She knows what fees she is paying and evaluates them periodically against the value received. She understands the financial conflicts of interest of her advisors and weighs the advice with them in mind. She completely avoids the vast majority of financial services firms and professionals like Odysseus tied to the mast.
# 3 Investing Takes Too Long
Successful investing is all about the “get rich slow” plan. That would be fine if we weren't both impatient and mortal. Most reasonable investing plans span decades. Juxtapose that with our attention span, that may be minutes at best, and you have a recipe for failure. Jack Bogle has repeatedly said that the three most important words in investing are “Stay the Course.” It actually doesn't matter what your investing plan is, as long as it is something reasonable. What really matters is that you can stick with it in the long run. Better to be 60% stocks and stick with it than 80% stocks and bail out in a bear market.
# 4 We're Competitive
I like competition. I thrive off of it. As a kid, a friend and I would play trampoline basketball. The game would last hours because neither of us wanted it to end. We didn't really care if we won or lost, but we wanted it to be close. “Win by two.” “If I make this shot, I'm back in.” “Make it, take it.” “Dunks are worth two.” Nobody ever asked, “Why's James crying?” because James didn't cry. It should be no surprise that despite relatively humble beginnings, one of us founded The White Coat Investor and the other one is a successful Chief Investment Officer of a private equity firm. Now, most people probably aren't as competitive as we are, but most people ARE competitive, particularly those who earn enough to actually be successful investors. However, when it comes to actually winning at investing, competitiveness is bad because it leads to two problems:
- Keeping up with the Joneses. If you try to keep up, you spend too much and have nothing to invest (see # 1 above).
- We focus on beating the market or other investors rather than our own financial goals.
You see, investing is a single player game; it's just you against your financial goals. You don't have to beat the market. You don't have to beat your neighbor. You don't even have to beat your brother-in-law. The truth is we can ALL win. But if you don't keep that in mind, you'll end up succumbing to FOMO- Fear Of Missing Out and end up buying high and selling low, a financial disaster.
# 5 It Requires Hobby-Level Dedication
Investing is a great hobby, perhaps the best-paying hobby there is given the cost of high-quality financial advice and management. But our financial world is so complex that if you don't take up investing as at least a minor hobby, you probably won't become good enough at it to be successful. That's unfortunate since it is such an integral part of a successful life. Plus it's boring for most of us. Here we are, with a second job as our own pension fund manager in our 401(k) world, and we know nothing about doing that job and have little interest in learning. What a tragedy.
On the other side of the problem are people who take it to the extreme. All of a sudden, all of our decisions are first weighed from a financial point of view, even when that is inappropriate. Perhaps we become miserly. Perhaps we become consumed by a quest for more, more, more. Perhaps we just can't step back and end up living an unbalanced and unhappy (even if financially successful) life. Picture the 65-year-old retiree who spends 3 hours a day reading up on stocks. What a waste.
# 6 Wealth is What You Don't See
This confuses all kinds of people. Lots of people think they want to be a millionaire, but what they really want is to spend a million dollars. Unfortunately, those two things are complete polar opposites. You literally become a millionaire by NOT spending the $1 million that you could have spent. This is surprisingly non-intuitive and I'm convinced not understanding it keeps many from being successful. So figure out what you want – to have lots of money or to spend lots of money, and take the steps required to get there.
# 7 The Frank-Starling Curve of Investing
The Frank-Starling Curve is well-known to physicians who care for congestive heart failure patients. The goal is to have the patient's blood volume high enough to maximize the heart's stroke volume but no higher. Too low, you give them fluids. Too high, you give them diuretics to take off fluid.
Investing is somewhat similar. Increasing the time and effort you put into it helps, but only up to a certain point. Beyond that point, you're often hurting yourself. Someone who is invested in crummy mutual funds and never rebalances is on the left-hand side of the curve and would benefit from more effort. A day-trader is way off the right side of the curve. It isn't intuitive, but at a certain point, more effort and time spent on the task is more likely to hurt than to help.
# 8 Debt Numbness
Spending borrowed money for educational expenses and basic necessities for four years in medical school (perhaps eight or more if the doc also borrowed for undergraduate) and then allowing that debt to become even larger due to deferment, forbearance, low Income Driven Repayment payments, or special resident refinancing programs for three to seven more years of training causes doctors to be numb to debt. Everybody they interact with owes hundreds of thousands in student loans. It feels normal. Due to the long period of indebtedness, this attitude toward debt extends to auto loans, credit cards, 0% down doctor mortgages, and even borrowing for the education of your own children! This debt anesthesia can severely retard your ability to build wealth. Instead of your income being used to live the good life and build wealth, it is used to service payments. You've become a fantastic investment for somebody else!
Investing is hard, but it's no harder than finding passable highways in Baja California
A related problem is the concept of “good debt.” I read about this all the time in blogs and books, although the definition varies. Mortgages get thrown into the “good debt” category because they may be tax-deductible and the underlying asset may appreciate. Student loans get thrown into that category because “they help you earn more.” Low interest rate debt gets thrown in there too, no matter what the original purpose of the debt was. There is no doubt that borrowing at 2% and earning at 8% is a winning formula. The problem is that the concept of “good debt” worsens debt anesthesia. You no longer feel like your debt is an emergency because it's “good debt” so you justify not paying it off as quickly as you ought to. In addition, borrowing at 2% and NOT investing at 8% IS NOT a winning formula, but that's what most who justify their debt because of its low interest rate do. Any time you have debt and you're spending money on anything non-essential, you're essentially borrowing to fund that purchase. You wouldn't borrow at 4% for a Hawaiian vacation? How is that different from going to Hawaii while you still have 4% student loans? And 8% student loans? Are you nuts?
It's a simple fact — money that is going to pay the interest (and even the principal) on your past spending cannot be invested for your future spending.
# 9 You Change
Another issue that makes investing difficult is that very little is static, especially in your life. Your spending, your consumptive desires, your health, the size of your family, your tolerance for risk, and your income all change over time. How can you set a retirement goal if your spending keeps changing? How can you set a savings rate when your income keeps changing? How can you set an asset allocation when your risk tolerance keeps changing? This need to stay the course is constantly butting up against the fact that the course is constantly changing, and that makes financial planning and investing a tricky business of constant adjustments.
# 10 The Investor Matters More Than the Investment
Too many investors focus their efforts outward, constantly searching for the best investment. In reality, they should be focusing inward, making themselves the best investor possible. The truth is that your actual investments, your asset allocation, so long as it is reasonable, matters far less than whether or not you can stick with it through thick and thin.
# 11 We Are Poor Judges of What Will Make Us Happy
“Mann Tracht, Un Gott Lacht” is Yiddish for “Man plans and God laughs.” It turns out we are incredibly poor judges of what will make us happy. We think buying things, or buying experiences, or traveling, or giving money away will make us happy, then are surprised when the happiness we were seeking turns out to not exist or to not last. The problem comes when we start making long-term financial plans and it turns out that isn't what we want after all. At its extreme, this leads to divorces and massive repeated home renovations, both of which can be devastating for wealth building. But even in its more minor forms, it can be costly.
# 12 We Don't Do Boring Well
Good investing is boring investing, but looking for excitement with your investments is a good way to go broke. Our desire for novelty is a major impediment toward staying the course with a long-term sensible plan.
Those are the twelve reasons investing is hard. Conquer them and you will find a simple, but not easy, pathway to wealth.
What do you think? Is investing hard or easy? Why? Comment below!
I’d add one more: They don’t know the “why” behind their investments. In other words, a clear and definable goal has not been made that provides the motivation to learn the right way to invest and then “stay the course.” Without the “why” very few people have the discipline to become good investors for all of the reasons that you mentioned.
Also, #11 is so key. I see so many people who are trying to spend their way to happiness, just to get stuck upside down in debt. Then, they realize, not only did the purchases NOT provide happiness, but they further entrenched them in debt and made their happiness worse.
I also agree with the competitive nature, but I would combine this with a lack of education. If the person were truly competitive, they would learn that index fund investing beats the vast majority of investors. Instead, they learn “just enough” to be dangerous and think that picking individual stocks will be a sure way to “beat” other people. Over a thirty year timeline this is unlikely. And it requires even more financial discipline (“stay the course”) when an individual stock tanks than it does a fund, in my opinion.
Great post!
TPP
Not to mention perhaps staying the course isn’t even the correct thing to do if you are investing in individual stocks.
Haha definitely true.
Just makes it all much more complicated!
I love the term “debt anesthesia” and it really is a valid point because I certainly fell under its influence. At a certain point the pile of debt was so high that in your mind you are thinking well adding $1k is really not going to shift the needle that much so might as well do it. That and the fact that I figure I will always earn a lot more money later (not a given, by the way) and future me can afford it so let present me have a little fun now.
It was a bad way of thinking and it is very counterintuitive to what should have been the proper line of thought.
I never got the fact why some people need investing, especially in retirement accounts, to be exciting. Boring is good. Exciting investments typically translates to gambling. I have given up trying to get one of my friends to invest in index funds because he tells me it is too boring and he likes doing research and strategically pick stocks. I think it is too much effort for what likely will be a losing game.
By the way that is an incredible picture of the highway ending abruptly. I do hope there was signage telling about it otherwise that could have made for a very interesting ride.
No. There was no sign. There was not even a cone. There were two tiny six inch rocks as the only form of warning.
All are very good points. And you have the very most important thing under #1.
“The discipline to not spend your entire income.”
This alone will not guarantee financial security but without it all hope is lost.
Good post. The only valid definition of “good debt” I’ve found is debt someone else is paying for you. Any other debt takes money out of your pocket. The only way I know to have good debt is income producing real estate. I like the idea that my tenants are giving me tax free equity gain every month by paying down the principal on the loan I used to buy the property. I never go over 75% LTV, otherwise the cash flow gets too thin. You can get wealthy with real estate but it’s not get rich quick and certainly not for the easily bored. Time is your ally in real estate. Start young and retire earlier because you have the time to build equity that someone else is paying for you.
Even there, you would have more cash flow if there wasn’t any debt and you could be reinvesting that money in other real estate (or stocks or bonds) rather than using it to service debt.
Any property cash flows if one buys in cash, so dont know if thats a good metric of “returns”.
the cash on cash return or irr tends to be better with appropriate leverage.
I agree that IRR is the best measure of total return. I also agree that leverage works. In fact, it works both ways.
Yep ..leverage is indeed a double edged sword
Also be careful of the irr syndicators tout..it can be “massaged” – compare unleveraged irr to leveraged irr as well.
#6! Reminds me of the old book “the Millionaire Next Door”. It is a road less traveled, but when you reach financial independence earlier than most it is well worth the ride.
Thank you so much for this post. I needed to read this today. I needed to hear and be reminded that investing is a single player game; it’s just you against your financial goals and the wise words of the late Jack Bogle, Stay the Course. It can be discouraging sometimes seeing the long road in front of you, especially when you are very early in your career. #getrichslow.
I’d add that not only is investing boring, it can often be painful. If you are starting out and see half your retirement savings disappear, that is painful and people will take actions to avoid such pain. It’s also the reason people sell at the bottom of the market. So in a way good investing forces you to do things that are counter-intuitive in the short run.
I too will add one more. Financial decisions are inherently emotional decisions, especially when it come to OUR money. That’s in part because they involve future comfort levels, freedom, independence, and peace of mind, none of which can be truly described out of context.
Staying the course does change when you near retirement and the early years of retirement where most will change course to a more conservative portfolio to preserve capital and maintain lifestyle. A major hit at that time is possibly devastating long term
Investing is (or can be) simple, but definitely not easy! It maybe a one player game but it’s one of the only games where the opponent is yourself! Controlling emotions (such as selling low and buying high) can be hard to do…even when you’ve read a plethora of investment books.
I disagree that investing is a one player game. Real estate, my preferred investment, is very much a team sport. You need good agents to bring the properties to you, a good lawyer to set up the LLCs, good CPA to get the tax picture right ( CPA should have property investments also) and a good property management team is critical for the long term success. Getting a good team puts you way ahead of the crowd.
Would you feel better if I said a “single team game?”
Not sure if this would count as a corollary of #11 or a stand-alone reason, but I’d add: We mistake wealth accumulation from investing as an end in itself instead of a tool to free up our time.
It doesn’t take much looking around the hospital or your last family reunion to find white haired investors with ample money who are seeking to make up lost time and establish meaningful human connections at the end of life, instead of prioritizing this from the start.
It ties in with your philosophy of charitable giving, Jim: If you adopt of the philosophy of “I’ll give once I hit my number,” or “I’ll reconnect with my family/old friends once I succeed financially,” you miss the point and waste a lot of precious time.
You can spend a lifetime accumulating the biggest hammer only to find near the end of it you never used it to build anything of substance.
Enjoyed the post,
CD
Via email:
I do not agree.
In my experience investing was hard years ago when I had about 20 mutual funds, a group of individual stocks and bonds. I didn’t know what “asset allocation” meant, and I subscribed to news letters that advised me when to buy and sell.
Over 20 years ago, I read about a group called Bogleheads and have followed their simple (but elegant) method of investing.
Now, at age 88, 90% of my portfolio is in two funds, Vanguard Total Stock Market Index Fund and Vanguard Total Bond Market Index Fund with an asset allocation of 40% Equity and 60% Fixed Income. I no longer attempt to time the market. My withdrawals keep my Asset Allocation balanced.
I don’t think that the principles of low costs, stay the course, buy the haystack can in any way be considered hard.
Thank you for your informative posts.
Completely agree. This was my trajectory as well although 30 years behind. Four index funds and that is pretty much it. The only thing that is remotely complicated is the various accounts over DW and kids.
Even if investing is a hobby that you love and want to spend time doing (#5), your circle of competence where you have an actual informational edge on the other market participants probably isn’t going to be big enough or diverse enough to fill out an entire portfolio. I go into a bit more detail on using passive investing to complement active investing in It’s Not Active vs Passive, but the gentleman above has it right: most of the time it’s way easier and way better to just use low-cost diversified index funds that match your risk tolerance. And it just so happens that there has been no better time in history to be a retail investor.
investing is as easy as anything can be once you learn the ropes from malkiel and bogle
Love the froggy fresh reference!
I love point number 12! Compound interest is one of the wonders of the world, except that it takes time for the miraculous event to occur. I love it when we are reminded (as I need to remind myself) that investing/saving needs to be boring. Meaning that it should be like watching paint dry….it takes time! Thank you for the additional reasons/encouragements towards investing.
I was introduced to your Twitter feed a week ago by a colleague and I can truly say it has saved me from my nightly routine of watching “mindless” news. I’m not an MD, rather a high earning CRNA searching for more ways to invest for retirement. Ive maxed out my 401K, ROTH 401K, back door ROTH, HSA and after tax 401k (which fortunately my practice offers). I went to Fidelity to open a taxable acct and they guy I met was heavily trying to sell variable annuity to me. From what I know, and what I’ve read from your website this far, I don’t believe this is the best route to go. He tried to sell the wonderful tax benefits to me…the annual fee is 0.25% and “fund fees may apply.” What do you think? On a side note, it’ll be wonderful to reach out to other members of the medical community, not just physicians. There is a lot of need in those areas as well. I’ve introduced you to a whole lot of my colleagues and will continue to do so. They find it hard to believe that I don’t have a CFP! I can’t believe they do!
Continue the great work…thanks CE
Variable annuities are generally best avoided. You can learn more here:
https://www.whitecoatinvestor.com/the-truth-about-buying-annuities-a-review/
We’re doing the best we can to reach as many as we can- physicians, dentists, CRNAs, PAs, NPs, PTs, OTs, pharmacists, attorneys, engineers, small business owners etc. Interestingly, at the conference I spoke at this month the docs were able to get CME for my talk but the CRNAs weren’t.
Spot on. Slow and steady, consistency, long term, wins the race.
At 53, I just developed a healthy addiction to learning about financial services & investing. Can I get your input on the following:
I have 3 retirement accounts; a current 401k, an old 403b and my late husband’s Tiaa- cref acct. As a beginner, I’ve struggled with uncertainties…am I making the right decisions regarding my investments?
1. Should I consolidate all the accts with Fidelity, my current 401k plan?
2. My 403b has ERs ranging from 0.34 – 1.06% (I just found out yesterday and was shocked). Thanks to you, I now look at what is going out of my acct. I’ve called Valic to begin the process of moving the acct. It currently has 89k (pretty aggressive assests). Good or bad idea?
3. This is the biggest problem, my current 401k has about 420k but most of the money is in a 2035 Target fund. I know it’s a lazy way to invest but I’m frightened to start making so many changes at the same time. What do you think?
4. I started a backdoor Roth 5yrs ago and bought several ETFs (8) and aapl, know what I know now, would have done things differently. I have $6500 ready to invest. I’m interested in Fidelity stock market index. Is it prudent to put all the money in this one stock or buy a few more transaction free ETFs?
Thanks, CECRNA
Not really hard in its basics, but being human we can make it complicated and difficult (or hard). Almost everyone knows if they want to retire they must give up spending now and invest. If you won’t do that, your retirement will be much less than it could be. Just a decision.