What do timing the market and a circle have in common? There’s no point, literally and figuratively. Some people would like to have you think they’ve cracked the code and there’s some secret formula. There’s not. They may have been able to “time the market” once or twice, but they probably can’t repeat it multiple times. Being correct for the wrong reasons isn’t repeatable, and with the market being so arbitrary, timing it correctly for the right reasons is unlikely. Despite this, there’s still a way to have enormous success while realizing great returns in the stock market, and today’s guest, Jesse Cramer, explains that.
In Jesse’s article, The Near-Zero Benefit from Timing the Market, he tells the story of three investors. All three investors have different experiences “timing” the market, and while they all have different outcomes, it’s not the outcome you’d expect. While you can’t time the market, time in the market can be just as lucrative. If you let your money compound interest over time, you’d be surprised at how much more you can earn by simply leaving your money alone.
Mindy:
Welcome to the BiggerPockets Money Podcast show number 335, where we interview Jesse Cramer from bestinterest.blog and talk about the near-zero benefits to trying to time the market
Jesse:
In my own mind, and when it comes to personal finance and investing, I think about this fraction. Let’s get back to mathy nerd town, okay? I think about this fraction where success is in the numerator and stress is in the denominator, and I’m not necessarily trying to maximize success. I’m trying to maximize that fraction, and there are two ways to maximize a fraction. You can either increase the numerator or decrease the denominator. I’m trying to increase success insofar as I’m also keeping stress low or hopefully decreasing stress, so it really is two sides to that ratio.
Mindy:
Hello, hello, hello. My name is Mindy Jensen and joining me today as co-host is Mr. Mindy Jensen, my husband, Carl, who you know, from 1500days.com and the Mile High Fi Podcast.
Carl:
Wait. Mr. Mindy Jensen?
Mindy:
Yes.
Carl:
Well, you know what?
Mindy:
This is my show.
Carl:
No, it’s all good. I’m thrilled to be your wife. You’re a fantastic partner. I will take Mr. Mindy Jensen any day of the week, month, year, decade, or my entire life. Thank you.
Mindy:
Wow. Did you do something wrong that I need to know about later?
Carl:
We’ll talk after we stop.
Mindy:
Carl and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.
Carl:
Ooh. I am not Scott, but I get to read the next part. Whether you want to retire early and travel the world, go on to make big-time investments in assets like real estate, or start your own business, or collect plastic dinosaurs, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dinosaur dreams.
Mindy:
Okay. This episode is about time in the market versus timing the market, or the near-zero benefit from trying to time the market. This whole entire episode was inspired by my friend, Jesse Cramer, the author of the article over at bestinterest.blog/zerobenefit. It is titled The Near-Zero Benefit From Timing the Market, and it is a really interesting look at the financial differences between trying to time the market and just keeping a steady pace. Jesse, welcome to the BiggerPockets Money podcast.
Jesse:
Mindy, Carl, thank you guys for having me here. I’ll say, Carl, my nickname is actually Triceratops, so as a dinosaur aficionado, I thought you would enjoy knowing that.
Carl:
Did you make that up? Did you make that up for us, or is that true?
Jesse:
I made it up for you, but for the next hour, it can be true. You guys can call me Triceratops. That’s totally okay.
Carl:
Jesse Triceratops Cramer.
Mindy:
Hanging over our fireplace is a replica Triceratops skull.
Jesse:
That’s cool.
Mindy:
Because why have a moose head when you could have a dinosaur head?
Jesse:
Totally. Is it one-to-one size?
Mindy:
When you order them, you can say how big you want it, and we got it three-feet.
Jesse:
Okay.
Mindy:
Because we had to get it in the door.
Jesse:
That’s pretty big.
Mindy:
They make them six-feet. Yeah.
Jesse:
That’s really cool. That’s cool.
Mindy:
Okay. Jesse Triceratops Cramer, we’re not here to talk about dinosaurs. That’s on Carl’s show. We are here to talk about your article, which this episode was inspired by your article. Your article was inspired by somebody who reached out to you that said, “Jesse, I’m not tempted to sell anything in my 401(k) or Roth IRA, but I don’t know why I should continue buying at this point with the market doing what it’s doing. It’s not going up anytime soon. Can I contribute money to those accounts as cash and then wait to invest once the market hits its bottom?” I would love to know how your reader knows that it’s not going up anytime soon.
Jesse:
Well, that’s a great place to start, which is that this reader in question doesn’t know what future the market holds for us, and I think the three of us don’t know. To most listeners, I think most listeners, they probably don’t know either. The future of the market is very murky. I’d liken it to driving into the fog. In general, life in general is driving into the fog. You look in the rearview mirror and maybe what’s behind you is crystal clear, but what’s ahead of you is quite unknown, and investing is no different.
Mindy:
I will say that I did successfully predict the … I was off by one day, the March 2020 crash.
Jesse:
Ooh.
Mindy:
I predicted it in October of 2019. It was a whim. I said, “Oh, and the market’s going to crash on March 14th,” and it turns out, I think March 14 was a Saturday or something or a Sunday, and it was actually Monday, or whatever, but nobody knows. Unless you’re Biff Tannen, and you got a copy, you stole a copy off the front seat of the DeLorean, you are not going to know when the market is going to change, so when you’re trying to time the market, you are going to probably get it wrong. By probably, I mean definitely.
Carl:
Let’s back up a second. This, what you just said is new information to me that you predicted the market bottom. If you know these things, Mindydamus, Nostradamus, I would appreciate you telling me in the future. Back to Jesse’s point and the fog comment, the thing that happened in March of 2020 was COVID, and that was a huge Black Swan event.
If I were to tell you in 2019 that this virus is going to ravage the world, shut down economies, two of the most powerful leaders in the world, the president of the United States and the prime minister of England are both going to catch this, and one of them’s going to be in the hospital … Both of them were in the hospital, how do you think the market’s going to react? There’s no one, no logical person would say the market’s going to take a little bit of a hit, but then go crazy because of all the fiscal stimulus, but that’s exactly what happened. I think that’s a great example of why you cannot predict anything, and anyone who says they can, even if they’re my wife, I call foul.
Jesse:
Right. That particular story, Mindy, I don’t mean this offensively, but you were right for the wrong reasons. Meaning-
Mindy:
Exactly.
Jesse:
… your prediction was right, but it’s not because you knew COVID was coming.
Mindy:
That’s true.
Jesse:
It was just a date that you pulled out of a hat, and a lot of people, I think, can fool themselves. Now you, obviously, haven’t fooled yourself but people can easily fool themselves into saying, “I was right. Therefore, I must have had the right reasons,” and that is just not always the case.
Mindy:
Ooh, that is a really good quote. That is absolutely true. I made that number up. I pulled it out of a hat. Let’s pronounce that correctly, hat, and it was on my podcast, Carl, thanks for listening, that I said it. I said, “Oh, the market’s going to fall on March 14th,” and it was actually the 13th that it fell, so I didn’t know what was going on. If I had known, yeah, for sure, I would have sold everything on the 12th, or whatever the high was, the 19th or whatever.
I would have absolutely sold, but I don’t have this crystal ball, so what do we do, Carl, with our money right now? We invest. We invest X number or percent every week, every month, whatever it is. We are investing in the stock market consistently because we are not trying to time the market. We have seen first-hand what happens when you try to time the market. Hey, Carl, let’s talk about that.
Carl:
Yeah. I think I’m a pretty, I don’t want to say solid investor, but well-adapted, but I had to go through a rough time to figure things out, trial by fire. That trial by fire was the Great Recession that happened. I think the market bottomed in maybe March of 2008, something like that, anyway.
Mindy:
2009.
Carl:
Yeah, 2009. I think the S&P hit 666, some ominous number like that. When all this started happening, I freaked out, like, “What is going on here? The market is dropping.” What I did was, I logged into my 401(k) account for work and dropped my contribution to just enough to get the company match, so I think it was $2,500. Now, Warren Buffett has a famous quote. It’s one of my favorite investing quotes of all time, and it goes like this, “The stock market is the only store where people run for the exits when everything goes on sale,” and that’s exactly what I did.
When the market dropped, I ran for the exits. It was the best buying opportunity probably of my entire life. I’m pretty certain of that, and I stopped buying, which is completely ridiculous. Unfortunately, that’s human nature, and that’s how humans tend to react. Another thing Warren Buffett says is, “Temperament is the most important quality of successful investing,” and that’s being able to stick to your plan, not freaking out when everyone’s running for the doors and also, on the flip side of that, not going crazy when the market is irrationally exuberant.
Jesse:
Love it. Quick aside, quick aside. Now, this isn’t a Triceratops story. I’ve been training for some half-marathons, and I don’t like listening to music because it makes me run too fast, and I get too tired too early, so I’ve been listening to Berkshire Hathaway investors’ meetings, shareholders’ meetings, so keep the Warren Buffett quotes coming, Carl, because I can’t get enough of Warren and Charlie answering people’s questions.
Carl:
Oh, god. We should go to the meetings some year. It’s great. Have you ever been, Jesse?
Jesse:
I have not, but I bought my first BRK-B shares back in 2021, so I’m a shareholder. I’m allowed to go.
Carl:
Okay, so if you go in March of 2023, I will go too. It’s awesome. When Mindy and I went, I’m like, “Do we really want to go to this? What is this? Some old dudes talking about stocks. This sounds horrible,” but it’s great. So inspirational, and rubber ducks, all kinds of weird stuff. To bring it full circle, they have a 5K, timed 5K, so you can run, and sometimes, I don’t know if they do it anymore, but Buffett and Munger used to hang out at the finish line.
Jesse:
Huh, that’s awesome.
Carl:
March 2023.
Mindy:
Okay, well, sorry to break up this little nerd fest, but let’s get back to this article. In the article, Jesse, what I really liked about this is you didn’t just use theoreticals. You used actual math, and you named three different investors. Normal Nick, good-timing Gerry, and bad-timing Bill. All three investors started their investing in 1985, which was a while ago. They are now 59 and approaching retirement. They all three used the S&P 500 for their stock investments. They all three invested 200 a month in 1985 and have increased contributions by 5% per year until today, where they are investing $1,216 per month. All three invest by dollar cost averaging. They buy high, they buy low, they buy in-between. They just are consistently investing, except for one time.
The Great Financial Crisis threw a small wrench into their plans. Nick stayed the course because he is normal Nick. Bill and Gerry decided that they knew more, and that they were going to try and time the market. Good-timing Gerry, we’re going to talk about later actually, because he is an anomaly that isn’t actually ever going to happen. Bad-timing Bill tried to time the market. When the true bottom hit in March of 2009, Bill was convinced there was more room to drop, so he didn’t get back in. He stayed out, and stayed out, and stayed out. He kept thinking there would be a new bottom. He didn’t deploy his cash again until 2013, when the market price had fully recovered to 2007 levels, and his wise wife screamed at him to get back into the market. I wonder if that sounds familiar to anybody on this show.
Good-timing Gerry managed to get ahold of Biff Tannen’s book, and he stopped investing at the very top of the market, and did not start investing again until the very bottom of the market. Now right there, not only did he time the market perfectly at the top, he also timed the market perfectly at the bottom. I would like to highlight a story from my friend, the Mad Fientist. Way back on episode 119, we were talking … This episode aired very close to the coronavirus beginning. We were talking to him about the market. The market had already crashed. He says, “This is something that I thought I learned from the 2008 crash, but I didn’t. You always think you’re going to act a certain way when this stuff happens, and then you don’t because it’s always different than you imagine.”
This is another one of those situations. Back in 2008, we had just sold our house in Scotland in 2007, and we sold it for 50% more than we bought it for two and a half years earlier. We did a live-in flip, but we didn’t know what that was called at that time. We invested half of the money in Scotland, and then we took half to America. The money we invested in Scotland got cut in half pretty much instantly because 2008 happened. That was a good lesson for my first big chunk of money, so then the American half, I was like, “All right. I want to invest this, but I don’t want to put it all in at once because I got burned with that other batch.”
I put in a big chunk and then the market went down a little bit more, so I put in a little less because I had less to invest, and then it went down a whole lot again. Then I just started trickling money in, so by the time the market bottoms in 2009, I was only investing 150 bucks at a time. Not because I didn’t have the money, but because I was like, “Oh, it’s going to keep going down, so why put a few thousand in when I could just put in a few hundred and then it’ll go lower?” Anyway, long story short, that was the bottom and I ended up having a fairly sizable chunk of cash that I didn’t even invest in what the lowest stocks may ever be in my life, and it was because I was trying to time the bottom.
I thought, “All right. Next time that happens, I’ll be better at this. I’ll actually increase my investing as the market drops so that I’m putting more money in cheaper, and I’ll make sure not to put little, tiny amounts in because I want to get this money invested.” Then fast forward, this all started happening and I’m like, “All right, great.” The markets were down, I don’t know, 5%, and I started putting some money in. Then I started doing the same thing that I did back in 2008. I’m like, “Oh, it’s going to go down more from here. Surely, this is it.” Then I was like, “Well, I need to have a plan that I stick to,” so I just put together a spreadsheet, which is what I do for everything, because he could possibly be the only one that out-nerds the two of you.
By that point, it was down like 12 and a half percent or something, so I just put the price for VTI, which is the total stock market index fund that he was investing in, or total market ETF that he was investing in, the VXUS, which is another ETF. I put those prices, I put the price, that was February 19th, and then I just mapped it all out, all the way down to 50%, and now I have these price targets that I can buy. I also cut up all the cash that I wanted to invest, and I allocated that to each of those price targets, so now I know when to invest and how much to invest. I can actually just put in limit orders in Vanguard to just then automatically buy them so that I keep my brain out of it. Because even though I have that plan in place, I still screwed myself up.
One day, I hit two targets in one day, so I had to manually try to put money in on that second target because the markets were tanking 10% and I couldn’t do it because my brain was like, “Oh, no. It’s going to go down more, so just wait,” and it’s been up ever since. My one target I missed because I was stupid and I let my brain influence me. Now the markets went up again, whatever, 20%, and now it’s back down again. Anyway, long story short, I can’t trust myself to do the right thing, so I have to make a plan and then automate as much as possible.
I think that is so important because you might time the market at the top. You’re not going to. Spoiler. You’re not going to, but you might be lucky to get it real close to the top. You will … This is Brandon, the Mad Fientist. He is way smarter than you. I’m sorry, but anybody listening, he is way smarter. He couldn’t get over this hump. He eventually went on to say in that episode that he had to set it up in the system to automatically buy at these levels, and never look at it because he can’t get over that.
Jesse:
Are you guys familiar with Danny Kahneman and Amos Tversky, behavioral economics? These are the guys who have won Nobel Prizes for their work in behavioral economics. Thinking Fast and Slow is the name of Danny Kahneman’s book. A couple things from him. The first one is, despite winning a Nobel Prize in behavioral economics, one of his biggest discoveries or biggest things he’s learned throughout his years of study is that he is just as susceptible to these cognitive biases as anyone that he’s studied, so that’s just a good lesson. One of the smartest behavioral economists in the world is just as susceptible as the three of us talking.
The second cool thing that you just made me think of, Mindy, or that Brandon, the Mad Fientist, made me think of, is this concept of current me versus future me, that we all do this in our planning. We say to ourselves, “Well, right now, times are fine and I’ve read all the books about the stock market, so when that bad time hits, when that bear market hits, future me is going to be fine. Future me is going to be okay, and I know exactly how future me is going to react. Future me’s not going to panic. We’re going to hold and it’ll be great.”
Then when the time comes and that future me actually becomes current me because of time going by, current me doesn’t always think that way. All humans struggle with this, this idea that we can plan for the future, “Things will be fine. I know it’ll be okay,” but once you are thrown into that ice water, and once you’re in that situation, you’re actually going to react quite differently than you might expect.
Carl:
What’s that famous Mike Tyson quote? “Everyone has a plan for the fight until they get punched in the mouth,” or whatever.
Jesse:
Yeah, that’s exactly right.
Carl:
What are you going-
Jesse:
That’s exactly right.
Carl:
… to do when Mr. Market punches you in the mouth?
Mindy:
Yeah.
Jesse:
That’s exactly right.
Carl:
It turns out, you should talk more about Jesse’s article, that even if you can plan it right, it might not matter that much.
Jesse:
Yeah. We can definitely talk through some results. I don’t know, Mindy, do you want to talk through how Gerry, and Bill, and Nick performed?
Mindy:
I would love to. Gerry did the best because in your theoretical, fake world, Jesse, when he timed the market perfectly one time and then rolled the dice and timed it again perfectly the second time, he now has $1.46 million, which is a nice chunk of change. I would like to have $1.46 million too. Bill’s, bad-timing Bill, is the worst because he did the worst. He missed buying opportunities for about five years. He now has $1.38 million. Well, that’s only $80,000 difference from the guy who did it the best and the guy who did it the absolute worst. Nick is in the middle, as you may have surmised, with $1.42 million, which is only $40,000 off the top.
This is only contributions. They didn’t sell anything. They just stopped contributing, and that was it. I would like to postulate that if you are going to stop contributing because you have won the lottery and timed the market at the top, you may be tempted to pull that money out. I think that you would definitely be tempted to pull that money out, and what are you going to do with it? Carl and I know a guy who, through a series of unfortunate events, his company got bought and his stock holdings were liquidated, or something, or he pulled them out right around 2008. He did a good job of timing-ish the market, but he never put them back in. That’s the thing.
Carl:
I have a joke for you three. What do good-timing Gerry, the Easter Bunny, and unicorns have in common? You know the punchline, and this alludes to what you said, Mindy, wife, that they’re all fictional. No one … I’ll back up a second. I’ve heard this in my life millions of times. I just heard it from a reader a week ago. Someone sent me an email and said, “I got out in January, right before all this inflation stuff went bonkers, and right before Russia.” I’m like, “Have you gotten back in yet?” “Well, no. I’m not sure when to go back, when to get back in.” You might be right once, and even if you are, it’s probably sheer luck because you can’t predict these things. No one knows how … Mr. Market does not react rationally. There’s too many moving parts.
You have to be right twice, and if you do that, you’re the Easter Bunny and you don’t exist because it doesn’t happen. There’s always these articles in the mainstream media, like, “Meet the person who called the Great Recession, and is now predicting another recession.” It’s all click bait. I’d like to see someone who got it right twice. I’ve never seen it. It turns out there’s one particular guy … I don’t know if I’m supposed to say a name. I don’t want to get yelled at or get sued, but every month, he’s got an article on like, “Blah, blah, blah says the great, the next recession is upon us and we’re going to have a 40% market crash.” Well, if you say that every month, you’re going to be right eventually, and then he’ll be like, “Oh, look. I was right.” “Well, you also said it like 50 times in the past 50 months, so you’re not actually right.”
Mindy:
“You just got lucky.” Tell me, do you feel lucky, punk? I’m actually getting that from the article. Let’s talk about if they sold. If they had sold their investments and rebought later, the conclusion is much different. Bill would have lost another 20%. That’s a lot. Perfect Gerry would be up 50%. Perfect Gerry is a unicorn. He is the Easter Bunny. He’s Santa Claus. He doesn’t exist. Now, we just ruined Christmas for everybody.
He doesn’t exist. He is a figment of your imagination, and if you have timed the market perfectly and you want to tell me about it, I don’t care. I don’t want you to send me an email at [email protected] and tell me all about the fabulous timing that you have done because, A, I’m not going to believe you, and B, you’re not going to ever, ever, every do it again. You should have bought a lottery ticket instead. That billion dollar lottery ticket, you should have bought that.
Jesse:
Going back to something that happened earlier, Mindy, when we talked about you being right for the wrong reasons, if someone were to email you and were to say that they were right timing the market twice, we’d have to ask, well, were they right for the right reasons? Because one thing that we find in decision-making theory is that if you’re right for the wrong reasons, in other words, if you’re right just by luck, then you’re being right is not repeatable, and that’s really what we’re going after here.
Can someone repeatably time the market? In order to do so, they have to have the right reasons time, after time, after time. That’s the only way that a decision can be repeatably correct. That’s where I challenge most listeners, maybe not all, because you have to have such a level of expertise that demonstrably, statistically is shown to exist very, very infrequently to repeatably be smart enough to time the market in this way. Almost no one has it, and it’s probably not worth seeking out.
Carl:
The thing I really like about your article though is even if you do get it right, the difference isn’t that much. I have one small nit to pick, which I’ll say right now, and then you can argue with me, and that has to do with sequence of returns. If you were to be good-timing Gerry, and instead of doing this in 2007, he would have done this closer to the start of his investments. He started investing in ’85, but let’s say he started in 2003. Then he’s got a lot more time for the money to compound and that would change things more significantly or the very long term, over decades, but I’m going to play devil’s advocate with myself. Now not only do you have to get two things right, but you have to do it very early in your investing career, which is, yeah, a perfect storm of things that are never, ever going to happen.
Jesse:
Totally. Yeah, what we’re talking about here in this particular article where I did cherry-pick some data, and I was answering this reader’s particular question about leaving all his assets in his account that were already there, and only turning the dial on his new contributions. You’re totally right, Carl, that depending on when it happens in your investing career and what the market is doing at that particular time … I mean, I could have run this again for someone who started investing in 1920 and perfectly timed the Great Depression, only to pick things back up again in whatever it was, 1950, in 1945. I don’t know the exact history, but it would have been a different percentage, a difference between Gerry, and Bill, and Nick. But right, the overall message is that Gerry, between the good-timing Gerry and the bad-timing Bill, I think there is a 5.8% portfolio difference sitting here in 2022 at 59 years old.
My question to myself and to my readers was, is the stress that Gerry and Bill went through, meaning the nerves of timing the market right, the nerves of when to get back in, is that worth it? Is that really worth that difference? Whereas, Gerry only outperformed normal Nick by 2.9%. Normal Nick didn’t worry about a thing when it came to market timing. I mean, maybe he didn’t like seeing the headlines that the market was down. He didn’t like seeing that his portfolio was down, but when it came to decision-making or decision fatigue, he didn’t have to worry about anything. At least from my point of view, that’s worth sacrificing the 2.9% gain that Gerry had over Nick.
Mindy:
That’s a really important point because I can see if you have the mental capacity to think to yourself, “I’m going to try to time the market,” you have the personality that is always on Yahoo News looking up the numbers on every day, multiple time a day. That’s a really great point. Who needs more stress in their lives? Raise your hand if you need more stress in your lives. Zero people are raising their hand right now because we all have enough, too much. Nobody’s looking for more. That is a really, really, really excellent point.
Carl:
Yeah. I’d like to make one other point. I think there are certain people, and they’re very, very rare. Maybe like a Peter Lynch, or a Charlie Munger who can, perhaps, pick stocks and do things to beat the market averages, but those people, if you read about Charlie Munger, I’ve got his Almanack, that’s all he does. He is obsessed with it. That is his life.
If you really enjoy it, maybe you can be the next Charlie Munger, but man, I’d rather be out riding my bike, or doing something than reading encyclopedias or whatever the heck Charlie Munger does with his time, so there’s the mental bandwidth. There’s other costs you’re going to have to pay, and is it worth it? Even if you think you could be successful, you’re probably fooling yourself because you’re not Charlie Munger, but even if you could, is it worth it? I personally don’t think so.
Jesse:
I had this conversation recently. I call it the success to stress ratio. In my own mind, and when it comes to personal finance and investing I think about this fraction. Let’s get back to mathy nerd town, okay? I think about this fraction where success is in the numerator and stress is in the denominator. I’m not necessarily trying to maximize success. I’m trying to maximize that fraction, and there are two ways to maximize a fraction. You can either increase the numerator or decrease the denominator. I’m trying to increase success insofar as I’m also keeping stress low or hopefully decreasing stress, so it really is two sides to that ratio.
Mindy:
Yeah, that’s absolutely right. To recap, Bill, bad-timing Bill messed up enormously. He was out of the market for almost five years. Good-timing Gerry had all that stress, well, and so did Bill. I’m sure Bill had even more stress than Gerry, but good-timing Gerry had all that stress and only has a 6% edge over him. That just is not reasonable. If I’m going to have that much stress, I want a 50% increase.
Jesse:
Right, exactly.
Mindy:
I want 100% increase.
Jesse:
Right.
Mindy:
I want to know that I have done a good job. Yeah, again, it’s not repeatable. He only has a 3% benefit over Nick. That’s not even … I mean, 3% is a rounding error almost.
Jesse:
Right, right, yeah. Going back to that fraction, I would argue that even good-timing Gerry does not have commensurate success to offset the stress increase that he got in his denominator of that little fraction. I think Nick is the best off of the three of them.
Mindy:
Further down in your article, you mention a MagnifyMoney poll that I think is really fascinating. 10% of investors cry from the regret of selling their investments too early.
Jesse:
Yeah, that’s … I mean, every poll I read, especially when it comes to finance and investing polls, I always try to take them with a grain of salt because you never quite know, what’s the actual question that they asked? Who exactly did they poll? What is the sample size? Okay. We should take it with a grain of salt, but yeah-
Mindy:
But-
Jesse:
… it doesn’t surprise me. Yeah, yeah. I mean, it’s a very interesting-
Mindy:
That one, that’s a fun little comment. 66% regret making portfolio choices based on emotion. That one, I bet the question was real close to, “Are you excited about making portfolio choices based on emotion?” Really, that’s huge. 66% regret making portfolio decision … Who has made a portfolio decision based on emotion that they were happy with? I mean, it’s not the people who aren’t … It’s the people who are like, “Oh my goodness. I just bought a Tesla and I really like this car, so I’m going to invest in the stock,” and they don’t really know anything about the history of the stock. They just buy it and they happen to catch that upswing. Those are the people that are excited about buying on emotion. It isn’t the people who are bad-timing Bill. He’s that 66%.
Jesse:
The emotion cuts both ways too. I’d say some people make decisions to sell based on this pessimism that they feel in the environment, and that’s a regrettable decision. Other people have made decisions to buy based on this exuberance that they feel in their environment, and that can be a regrettable decision too. People who bought bitcoin at the top because it was in the news everywhere. People who bought tech stocks at the end of 2021 because, “Why would Shopify ever go down in price? It’s Shopify.” Well, you can get fooled by pessimism, and you can also get fooled by exuberance.
Carl:
Jesse, I’m really curious. It seems like you’re studied this a lot. What would you tell to a new investor who came to you and said, “Yeah, I’m starting to invest, but I’m worried and I want to plan for my future. I don’t want to freak out when the dip happens, and I don’t want to get caught up when the exuberance happens. How do I manage my emotions? How do I manage that temperament to be successful over the long term?”
Jesse:
Great question. That’s like a trillion dollar question when you add up all the people who it applies to all over the world. The one thing that has helped me a lot is I would say, if you can’t tell by now, I’m a bit of a nerd for this stuff. I do read a lot about investing history, stock market history. I feel like I have a really good understanding of the fact that markets ebb and flow. That when things are really good, eventually, they’re going to turn bad because exuberance is irrational and can’t be maintained, and the opposite is true too. When things are bad, well, eventually, they’ll get good again. Because I have that foundational understanding, it does help me kind of … It’s like ballast in the bottom of my boat. It helps me stay steady, even when the waves are really rocking.
To anyone who’s new to this or is interested in, if they’re a young investor, trying things out, education is really important so that when things don’t quite go according to plan, you can fall back on the fact of like, “Oh, you know what? I actually read about something like this.” Because the opposite side of that coin that I think investors should really try to avoid is when they do make an investing decision without really any sort of educational understanding of why they’re doing it. Because they don’t have that why, as soon as things go south, it’s like they’ve been standing in quicksand and they’re like, “I don’t even know why I bought this thing in the first place. I’m going to sell.” Right? Well, because I do know why I bought in the first place, I really know why I bought in the first place, why I invested in the first place. I’m not really tempted to sell when things go south because I still have that conviction in my original reasons.
Carl:
I’m going to make one pretty nerdy comment, and I’d be curious to hear what you all think. I worried about this too because you always hear the market is up and to the right over the long term, so the question I ask myself is, why is that? I started researching it and population growth is one of them that causes economies to expand, but even more powerful is productivity gains, I think, like automation, things like AI.
If you believe that and you believe that the market is up and to the right over the long term, then the next piece of information you have to understand along the lines of what you said, Jesse, is that everything is cyclical. There is good times and bad times, but it doesn’t matter. Those can all be ignored because over decades, it’s up and to the right, and therefore, that should be the timeframe that you commit your investments, most of your investments to.
Jesse:
Yeah, I completely agree. Humans like to build stuff and we like to build stuff better. That’s that technological productivity gain that you were talking about, Carl. In the short run, humans get really excited about things, sometimes irrationally so, and then when things turn south, we get irrationally pessimistic about things, so that’s where you see this … I almost envision two mathematical functions laid over top of one another. One of them is steadily up and to the right, and the other one is this side wave that goes up above and below that line. That’s more or less how the market behaves in the long run, assuming the future’s going to resemble the past, which is, we’ll put a little asterisk there, but I’ve got the faith.
Mindy:
I was curious. In your article, you have a very zoomed in look on the approximately five years that we’re talking about.
Jesse:
Yeah.
Mindy:
There is the market is going along, huge dip down, and then a very kind of slow recovery in this. If you go to Google and you search for history of the stock market chart, you will find a 100-year … I’ll link to this in the show notes, which can be found at biggerpockets.com/moneyshow335. That’s a very tiny blip if you zoom out and look at the whole stock market picture. This is a fun chart.
Go ahead and zoom in on any one of these and it looks like the sky is falling on almost any three-month chunk of the stock market, but when you zoom out it is up and to the right, and there’s … Is this the Great Depression here, right here? April 1929, there is a huge spike and then a giant dip. That is a very, very, very long spike, or drop, but this one that we just went through is just teeny when you compare this to the whole stock market returns, so that is for the emotional people who are listening. I mean, I’m not really talking to the logical people. They’re like, “Yeah, I’ll just keep doing it,” but for the emotional people, look in and play around with this chart. It’s fascinating to see the huge swings that the stock market has. Overall, it’s up and to the right.
Jesse:
An important caveat to add to that, Mindy, when you’re looking at that chite, chart rather. I’m not sure what a chite is. When you’re looking at that chart, you’re seeing price. You’re seeing price return over time. What you’re not seeing is the fact that those who held stocks over that period are also receiving dividends off of those stocks, which don’t appear. When you think about a Nick … Or, I’m sorry. When you think about these hypothetical guys, the good-timing Gerry and the bad-timing Bill, who held parts of their money outside of the market for a period of time, they weren’t receiving any dividends on those investments.
You could look at price return and absolutely see these … You can zoom in, but really like you said, Mindy, everyone should be zooming out. They should also be aware that there’s this little component called dividends, which is actually quite consequential, that doesn’t show up in price return charts, so keep that in mind too. It’s another reason to stay invested.
Mindy:
Oh, that’s a really good point.
Carl:
Yeah, it’s significant. I read somewhere that people say the average historical return in the S&P 500 is somewhere around 9%, but without dividend growth return, so it’d be somewhere like 6 to 7%. That’s huge.
Jesse:
Exactly right, exactly right, which is, as you guys both know, and as many listeners know, when you compound 9% over, what’s an investing career, 40 years? Compound the 9% over 40 years. You know what? I’m going to do it right now using Google Chrome. 1.09 raised to the 40, you’re going to 31X your money, 31X. If I do 1.06 to the 40, I’ve only 10X’d my money. 31X versus 10X. That’s the difference between 6 and 9% when compounded for 40 years.
Carl:
That’s amazing.
Jesse:
Yeah, yeah.
Mindy:
Say those numbers again, please.
Jesse:
Sure, sure. One more time. Essentially, what you can think of this as is if someone does reinvest all their dividends and they receive the full 9% return on an S&P 500 investment, if you compound the dollar value by 9% for 40 years, you’re going to 31X your money. You’ll turn $10,000 into $310,000. If you don’t reinvest those dividends, say you spend the money on a new jet ski, and instead, you only get a 6% return, and you compound 6% for 40 years, you’re going to 10X your money. You’re going to turn 10,000 into 100,000. Would you rather have 310,000 or 100,000? I’ll take my $310,000, buy the one jet ski from that, and then have 300 left over. The jet ski, by the way, will be named the Triceratops. I just want to throw that in there.
Mindy:
Oh, yay. Okay. Einstein did not call compound interest the eighth wonder of the world, but he should have. He would have if he had known. I love that quote. I love that it was attributed to him everywhere you look and everybody’s like, “No, he didn’t say it.” I’m going to say he said it anyway, even though he didn’t. I know he didn’t, because the last time I said this, somebody sent me an email. Lots of somebody sent me an email. Compound interest is the eighth wonder of the world. I’ll say it. You can quote me.
Jesse:
That’s right, that’s right.
Mindy:
Jesse, thank you so much for your time today. This was so much fun. Please tell people where they can find more about you.
Jesse:
Awesome. Well, I would ask people to check out my blog. It’s called The Best Interest. I’m not sure if you guys know this. It was actually just nominated for Blog of the Year by Plutus, so that’s kind of cool.
Mindy:
Yay.
Jesse:
I was very surprised and excited for that. The address is bestinterest.blog. I write at least once a week and send out a newsletter, so people can read the new articles there. Then if you’d rather connect on a more social media basis, Twitter’s the place where my username is @bestinterest_jc.
Mindy:
Don’t you have a podcast?
Jesse:
I do, but the thing is, I really haven’t been releasing new episodes there for like nine months. I’m thinking about picking it back up. I had this weird hiatus where I didn’t know what direction I wanted to take it in. I’ve gotten some emails recently of people being like, “Hey, you stopped producing? Why you’d do this? I was listening,” so they’re motivating me to pick it back up, probably in a new, different format. Yeah, you can check out The Best Interest Podcast, and hopefully, I will start producing new episodes soon.
Mindy:
Jesse, I appreciate your time today. Carl, you have to do it because I’m the wife and I say so. From episode 335 of the BiggerPockets Money Podcast, he is Jesse Cramer. The other guy is Carl Jensen, and I am Mindy Jensen, reminding you that time in the market is better than trying to time the market.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
