Why I Invest In Indexes With A 10 Year View
Updated: Oct 24, 2020
I like investing. Well, that's not strictly true, I like making money from my money without having to do very much. I actually find investing highly stressful and confusing. Why am I always right about the stock market when I don't commit my money and when I do, it does the opposite? Murphy and his law have a lot to answer for.
The stock market generally scares the bejesus out of me. What is even more scary are the so called "Experts" that drive it. Over the years I've come to recognise that they, as a group, are clever but largely full of crap. Anyone can be right when you make a broad statement like "I can predict a stock market crash in the not so distant future". Well no shit Sherlock, it's pretty obvious even to me that there's going to be a stock market correction sometime in the future, so until you can say when and actually base it on some science, do one.
I used to imagine rooms full of statistical analysts all pressing buttons on a super computer that was linked across all the industry in real-time, working out endless algorithms of probability to forecast which shares would go up and which would go down. Then I joined the world of business and attended a few analyst conferences for my company. And whilst I'm sure everything that was said was nothing but the truth, it was a pretty rosy picture of how things were and at such a high level it didn't really speak about how things were really going in the engine room. Despite that, a whole group of analysts predicted the future share price, #MoneyForOldRope. Over the years I've read the analyst updates and quarterly results for every company I've worked for and unless it really can't be avoided, the view is generally upbeat, a little vague and at best a bit of an opinion of the CEO and CFO on how well things are and with a message that if it carry's on we'll all be great (Queue a thumbs up and a cheesy grin).
So I've come to this simple conclusion that the stock market as a whole will continue to move forward and then every few years, when everyone has run out of excuses and they have to start saying that it's really not going as well as they said it might and they might have been taking a bit more risk than they should to keep putting out good news, it all needs a bit of a reset as they've actually said it's a bit better than it actually is. Quick 20-30% drop on the stock market, a few million people screwed out of their life savings and pension and it's time to get back on the horse for another lap.
So accepting that is the case, why would you invest in the stock market? The answer to that is fairly simple:
Nowhere else will your money give you a greater return over time with next to no effort and with a 100% success rate over a long enough period with so little risk.
You may have to wait a long time but no matter when you invest in the stock market as a whole, eventually you will be in profit, you may have died by then but you will profit (how's that for a general bullshit statement like the one I was complaining about above).
The bit you can control is how likely it is that that period is as short of possible say 5 -10 years and how you eliminate the risk that I'm wrong and you'll lose everything. Index investing seems to be about the best answer to that so far. Index investing is simply investing in a group of companies instead of just one. There are loads of different flavours of index and some perform better than others at different times. By investing in a group of companies instead of just one, you reduce the risk of buying a lemon, you're buying a share in the whole orchard. But you can go one better than that even if you want to limit your risk and try and get close to a guaranteed return on your hard earned, invest in a "Large Cap Index".
There are a few index's that fall under this category that you've probably heard of and to name a few:
The S&P 500
The FTSE 100
The Eurostoxx 50
The MSCI World
All of these indexes have one thing in common. They are all made up of the top performing (read biggest) companies in their respective countries (or int he case of MSCI, pretty much the globe). At the smaller end, the Eurostoxx 50 is the 50 biggest companies trading in Europe (the clue is in the title). At the other end of the scale the MSCI world is made up of 2,700 of the biggest companies across 47 different countries. The most famous is probably the S&P 500 and FTSE 100 which are the top 500 companies in the US and the top 100 companies in the UK.
So I can sense you building up to the "So What" so here is why investing in some of these indexes is not the worst idea if you want a hassle free return over time. The common thing with these indexes is that they work to a number, like a club, a very exclusive club that only a certain amount of people can get in. They got into the club by being very successful and if they don't remain in the most successful, they get kicked out of the club to let the next successful guy have a shot.
Another way to think of it is like being out with a bunch of your friends and running into a grizzly bear. When you run into a bear with a group of people, you don't have to be the fastest runner, you just need to be the second slowest. Think about it. There you go.
So let's use the FTSE 100 as an example. The magic of index investing means you buy a piece of 100 of the most successful companies in the UK when you buy a FTSE 100 Index Fund. Every now and again a guy has a rough streak and falls to number 101. Now listen carefully, because this is the magic, he leaves the index but he doesn't take your money with him. He takes your money, and he gives it to the guy that has overtaken him and is the new 100 as he's doing a better job of growing your money. Boom!
Every time someone leaves the index, your piece of that company gets replaced with a piece of a more successful company. You only have a lemon until another strawberry shows up (OK, I think I've taken the fruit analogy as far as I can take it). And by this repeatedly happening over time you're going to be as successful as the top performing 100 companies in the UK year after year so until there's a stock market crash or recession or war or some other natural disaster that affects all 100, you should pretty much enjoy forward momentum and grow your nest egg. The other bit of magic is that unless it's the end of the world or some similar kind of apocalyptic event (In which case, if you're worrying about the stock market performance you need to have a word with yourself) the chances of losing everything, is pretty much impossible. No matter how bad it gets, if the game continues to exist, you continue to be a player. There's not many other investments that can say that.
So whilst it's impossible to predict a stock market crash or some other disaster, you can pretty much reduce your risk of buying a bad company by buying all the best ones all the time. Then it just becomes a matter of time and quite simply, the longer you leave it, the more it will grow. If there's a crash and you can leave your money invested and ride it out, you'll get it back. If you sell during a crash, that loss is money gone forever. So if you can't leave it in the stock market for at least 5 years and even better 10 and it's money you need, maybe don't invest it in the stock market or if you do, realise you're actually gambling, not investing.
To put that in perspective, here's a nice little factoid about investing with a 10 year view.
If you invested $10,000 in the S&P 500 right at the peak before the 2008 stock market crash (a pretty bad one for those who remember it) and stayed invested throughout ,10 years later in 2018 you would have had $20,000. Not only would you have made back everything you "lost" through the crash, you would have doubled your money. Which is pretty much why i'm comfortable putting my money into index funds with a 10 year timeline.
Please understand, I'm not saying you can't lose, no one can say that, what I'm saying is; as long as the stock market has existed, nobody has lost money yet if they can leave the money invested as long as it needs to be invested in a broad and established index like the ones mentioned above.