The World’s Best Stock Market Tip
If you’ve watched a Marvel superhero movie, like The Avengers or Thor, you might recall Loki. Like Thor, the god of thunder, Loki’s character is based on Norse mythology. But unlike Thor, Loki loves mischief. He’s also in charge of the stock market. That isn’t mentioned in the movie series. But roll with this for a moment. It’s key to the world’s best stock market tip…one that should help you maximize the money you’ve worked so hard to earn.
A couple of hundred years ago, Loki’s adoptive father, Odin, said:
“Loki, you’re in charge of the stock market. Make it average between 7 and 11 percent annually over every 30-year period. If it doesn’t, I’ll command a giant jack rabbit to eat you alive.”
Loki didn’t want to die…especially at the buckteeth of an eager Easter bunny, so he makes the stock market average between 7 and 11 percent over every three- decade period. The worst 30 years he created was from 1929 to 1959. US stocks fell 87 percent between 1929 and 1932. But over the 30-year duration, they averaged 8.24 percent. In other words, a $10,000 lump sum investment in January 1929 would have grown to about $107,000 thirty years later.
Thirty years might sound like ages. But if you’re 60 years old or younger, that’s your investment time horizon. While you’re working, you’ll be adding money to the markets. And when you retire, you’ll be withdrawing a sustainable percentage, so your money will last at least as long as you. In other words, even if you’re 65 years old, and you live to 95, your investment duration would be 30 more years. It could be even longer if you’re bequeathing money to family.
Loki, however, doesn’t want anyone earning 7 to 11 percent over any 30-year duration. By seducing and frightening investors, he can increase the odds that they won’t reach their financial goals. To do that, he ensures that almost no individual calendar year sees returns within the 7 to 11 percent range.
For example, from 1990 to 2020, the global stock market averaged 8.6 percent per year. That was within Loki’s range.
In 2010, global stocks gained 8.62 percent. But that was the only calendar year between 1990 and 2020 that saw a return between 7 and 11 percent. In 29 out of 30 of those years, stocks earned less than 7 percent or more than 11 percent.
To frighten people, Loki created 9 calendar year declines between 1990 and 2020. He also created 15 years where stocks gained more than 15 percent. His goal is to push as many people as possible from a sensible long-term plan.
For example, over the 15-year period from June 30th, 2004 to June 30th, 2019, a $100,000 investment in Vanguard’s S&P 500 index fund grew to $345,650 after fees. That was an 8.62 percent annual return. But according to Morningstar, the typical investor in that index fund, over that same time period, earned just $251,440. Loki made that happen by poking people’s fears and greed.
During years when stocks rose, most investors added more money. During years when stocks fell, they added less or they sold. As I referenced in Millionaire Expat (3rd edition), the performance gap was even wider for investors in actively managed funds.
Decade after decade people fall for Loki’s ruse.
So, what is the world’s best stock market tip? It’s the one that helps the greatest number of people over the longest length of time:
Own a diversified portfolio of index funds or ETFs. If you can, add money every month. If you’ve earmarked a large sum to invest, do it right away. Don’t try to time the market. After all, long-term success depends on your relationship with…marshmallows.
Let me explain.
Psychologist Walter Mischel began experimenting on pre-school children in the mid 1960s. Mischel’s researchers placed a child’s favourite treat (for some it was a marshmallow) in front of the child. The researcher would leave the room. But before doing so, they said they would return 15 or 20 minutes later. If the child hadn’t eaten the treat by the time the researcher came back, they would receive a second treat.
Most of the children couldn’t wait. And years later, Mischel learned that the children who gobbled their treats the fastest were less successful as adults. They were less physically fit. They had less money. MRI scans revealed their pre-frontal cortex¬–an important part of the brain that influences self-control–was less developed than it was in the adults who exhibited self-control as kids.
But Mischel soon learned he could boost a child’s self control if he taught them to ignore the treat. When the children focused on something else, it increased their odds of earning a second snack.
This also relates to financial goals. Like that marshmallow, you should ignore stock market movements. Ignore all stock market predictions, too. Yes, you worked hard for your money. And yes, it’s tempting to follow the market. But distract yourself from that. If you feel the urge to check your portfolio’s value during a downturn, go for a walk or a bike ride instead. Play with your children. Schedule a dinner with your friends. Meditate or practice yoga.
Ignore the marshmallow.
Stick to your long-term plan.
Don’t let Loki have his way.
Andrew Hallam is a Digital Nomad. He’s the bestselling author Balance: How to Invest and Spend for Happiness, Health and Wealth. He also wrote Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas
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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.