We Should Buy Index Funds Instead of Stocks Even If We Can Beat the Market
Many of us that frequent personal finance sites are passive investors. We buy index funds because we aren’t convinced that anyone can outperform the market in the long run. However, some of us still buy stocks because we believe beating the market by taking on more risk is possible. Some of us fail, but even if we succeed, we should buy index funds.
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Why? Our goal is to become wealthy and not beat the market. Many of us feel that our money will grow faster if our returns are better. While this is certainly true, imagine how our attitude towards money is affected when daily fluctuations are high. Some of my stocks are pretty volatile, so I look at my performance daily (buying more and selling shares when needed). Recently, the value of my portfolio changes more than $1,000 per day at least 30% of the time. That means that I could be $1,500 richer one day, and $3,000 poorer the next.
Let’s say today’s move was $3,000 to the down side. Why would the $5 dollar Starbucks coffee feel like anything? Losing $3,000 and $3,005 is pretty much the exact same thing. Now on the brighter side of things, $5 is nothing when it means gaining $1,500 and $1,495 for one day.
I can really see this happening to myself. I’m starting to lose my attitude to save. When my portfolio loses money, I feel like another couple bucks isn’t much. When it gains money, I feel like I can afford it. This means that every time I feel this way and spend money, I’m losing the opportunity to save and grow it. Little things add up, and although we may be able to beat the market for years, we might still lose because we have lost all the extra opportunity to keep funding our investment accounts.
Slow and steady wins more ways than one.
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