The Stairway to Financial Heaven: A Perspective on the Price We Pay
“Be fearful when others are greedy, and be greedy when others are fearful.”
“The stock market is a device for transferring money from the impatient to the patient.”
I would like to offer a total perspective shift on investing that will hopefully help you through the current challenges we face. I gave my 9 year old a riddle the other day: ‘do you have to take more steps if you walk up an escalator slowly or quickly?’ She thought about it for a second and correctly answered that, counter-intuitively, the faster you walk/run, the more steps you take.
To make the point more clear, let’s take the extreme. In one case, you run so fast that not even 1 step rotation takes place (i.e. an escalator may have 80 or 100 ‘steps’ that are constantly ascending). Conversely, if you walk incredibly slowly, you could ride the whole escalator without taking a single step.
This actually has a lot more to do with investing than you realize. If you need to be somewhere ‘quickly’ financially speaking – as in, you need the money today or tomorrow – then 100% of that money has to come from you. You have to take all the steps, as it were. If, instead, you have a really long time before the financial event, then you can hop on the proverbial escalator and let it do most of the work.
To make the analogy more clear, if you need $100K tomorrow for a down payment on a house, you are the entire source of that $100K (you had to take all the steps – the escalator provided you no benefit). However, depending on a few assumptions – like return rates and how long your investment time horizon is - then you could invest a very small amount, like $1K, and eventually that $1K would turn into $100K without your having to invest another dime. Or to use more realistic numbers, if you invested $10K today and earned 10% a year (the average long-term returns of the S&P 500) then the $10K would be $20K in about 7 years, around $40K in 14 years, around $80K in 21 years, and a few years after that $100K. So the investment escalator, the financial stairway to heaven, would have done 90% of the work for you. That is why the saying ‘it is not timing the market, but time in the market that matters’ is so true.
But there is another saying that I learned in Econ 101, and that is there is no such thing as a free lunch. As with many things in life, we must pay a ‘price’ for this money escalator ride. Want to be healthy? Pay the price of working out and eating well. Or conversely, if you don’t stay active and eat well, you will pay the price in the form of obesity, potential health issues, etc. Want to write a book? You need to pay the price of turning off the TV/internet and putting fingers to keyboard rather than spending that time on leisurely pursuits. But you also get the rewards. Work hard and life is easy. Take it easy, and life is hard.
So as you ride the stairway to financial heaven, there is a price you have to pay. And you are paying that price right now. The price for those 6% - 10% long-term returns, the price for having the market pay for much of your retirement rather than you, the price you pay for having stocks chip in a good portion of your kids’ college expenses rather than your having to pay 100%, is having to witness periods like this. As you ride that escalator day after day, once in a while some scary monsters will jump out at you as though you are on a haunted house ride at Disney Land. But let me tell you a secret: if you stay on the escalator rather than jump off, if you realize the scary monsters won’t hurt you or better yet ignore them all together, then you will invariably arrive safely to the end of your destination. The ride is designed to get you there, as long as you don’t jump ship mid-journey.
How much a price you pay is really a function of your mental makeup. For some people, the price is truly too great. Although they have a long term time horizon, they simply can’t handle the short-term swings emotionally. Even if over their 10 or 20 year time horizon, the events of today don’t even register as a blip on the charts, their minds are simply not wired to handle the ups and downs along the way. As I wrote last month, you must know yourself well. If you are going to get scared out of stocks, don’t invest in them (or better yet, find someone you trust to invest for you and then go about the rest of your life). But remember, for those who try to take it easy, life (in the future) will likely be hard. The price you may very well pay for not investing in stocks for the long term, or bailing out at just the wrong time, is a hard retirement.
You have to give yourself a break. There are about 7.5 billion people on earth. A few short months back, no one knew the events of today were around the corner. This was a new scary monster on the attraction ride, so even for those who had been on the ride many times before and were thus dulled to the inevitable surprises, this was a bit of a shocker. But the ride is still sound, the escalator still works, this time is not different (in the sense that stocks will recover; I realize by definition each surprise is unique). The question is the only question you should be asking yourself on a regular basis, for all of your actions: am I willing to do what is hard today (in this case not panic for funds you don’t need for years) so that the future is easy? Or am I going to do what is ‘easy’ today, and risk a hard life down the road?
Each investor’s financial and emotional circumstances are unique. We are here to answer any questions you have or to discuss your specifics.