“Is now the right time to invest Loui?”.
That is the question I hear the most when people start to invest.
And for a good reason.
This article will show you the very basics of market timing.
It will show that the answer for when the best time to start investing will always be yesterday.
No matter when you will ask me this question.
Yesterday will be my answer.
The Fear of Losses
Starting to invest a lot of money into the stock market can feel intimidating.
What you would spend on an awesome six-month vacation is now invested in the stock market where you have no control of what is going on.
That’s why many is opting for the:
“I’m going for the vacation instead of investing. Then I have a 100 % guarantee that I will get some pleasure out of that money”.
While that might be true.
It is also 100 % sure that you will always struggle financially.
Risk equals rewards.
That is not only true in investing.
It is true in every aspect of life.
And this article will help you feel a bit better about “risk” when it comes to investing.
How I Look on My Investing
There are two ways I think of my investing.
The philosophical part about my investing is the decision that consuming won’t make me any happier.
When my basic needs covers:
- A roof over my head (which I haven’t had for the last 10 months)
- Healthy foods
- Proper clothes to keep me warm.
(And sneak a little pizza with a box of wine in).
Then I’m good.
Another philosophical aspect of why I won’t spend mindless money on stuff is because I see every purchase as taking a little part of the earth made into these little things we just have bought.
It should be left alone.
This is how I see the practical part of investing.
There are two phases in investing:
The accumulation phase is where most of us are in.
It is where we still do the grind on our job.
Stashing away cash to come ahead financially.
At this stage, we should embrace a financial crash. This just means that we can buy investments cheaper than they normally are.
So except if a market crash means that you will lose your job, then a crash is good.
If you have 10 eggs home in your fridge, and you need 20 to make a delicious omelet for all your friends.
Would you then panic if the price of eggs was half of what you have paid for the ones in the fridge?
No, you wouldn’t.
It is the same way with stocks.
Don’t panic when everything turns red. Buy everything you can.
It is another story if you are in the income phase.
You are in the income phase when you have +25 times your annual spending invested.
This means that you are financially independent, and you are probably +35 years old.
No matter how little you spend, having +25 times your annual spending in the market is a lot of money.
By this time we want to make sure that the market tanks. You won’t lose all your money, which will be the result of you going back to do work you don’t like.
We are doing that by introducing some bonds to your portfolio.
That allocation can be anywhere from 10-50 % of your entire net worth in bonds, and the rest in stocks.
So when the market tanks, you can either withdraw money from your bonds instead, or you can rebalance by selling some bonds and buying some stocks.
When we rebalance our portfolio like that we make sure that we sell high and buy low.
The story of Three Loui’s
Now we come to the juicy part of this article.
You are about to meet the three Loui’s.
The only thing that these three Loui’s have in common is:
- They finished as a Mason in 2011
- They all want to save 50 % of their salary (10.000 DKK/month)
- They earn the same
- They all invest in the same Global Index Stock Portfolio
- They all invest from 2011 to 2021
But that is about it.
Besides that, they are very different.
I have given them a little nickname;
- Wuss Loui
- Don’t Bother Loui
- Smart Ass Loui
The difference between them is when they are buying their stocks.
Which is the only difference between them.
Say Hello to Wuss Loui
Wuss Loui finds it super appealing to be financially independent.
He thinks that 10.000 DKK is a lot of money to invest each month.
And he is super afraid to lose money in the stock market.
Here is Wuss Loui’s approach to investing:
He will save up 10.000 DKK/month cash.
He only feels like investing when the market is doing super well.
Then it doesn’t feel so intimidating.
He will be investing ALL his money RIGHT before a > 10 % stock market crash.
There have been four bigger corrections/crashes in the past 10 years.
Here is where the worst periods started:
- May 2011: -21,87 %
- June 2015: -13,76 %
- February 2018: -14,45 %
- January 2020: -22,15 %
These are also the dates that Wuss Loui will be investing.
The thing is that Wuss Loui leaves the money invested, gets scared about the crash, and keeps saving in cash right until the next crash comes.
The major takeaway is that he leaves the money invested and doesn’t sell when everything crashes.
He will be investing the following money on the different dates:
- May 2011: 50.000 DKK
- June 2015: 490.000 DKK
- February 2018: 310.000 DKK
- January 2020: 230.000 DKK
As we hit March 2021 in a few days.
Wuss Loui’s net worth would be:
Stock portfolio: 1.563.656 DKK
Cash: 130.000 DKK
Even though Wuss Loui invested at the worst time possible.
He still managed to get a rate of return on:
3,3 % / Year
This is far from good, but it is the worst-case scenario we are dealing with here.
Say Hello to Don’t bother Loui
Don’t bother Loui is a bit different from Wuss Loui.
He likes the idea of financial independence. But he doesn’t like crunching numbers and checking the stock market.
What he prefers to do is anything but dealing or thinking about investing.
Don’t bother Loui sets up an automatic money transfer from his private bank account to his investing account.
And makes sure that the 10.000 DKK/month gets invested every month.
He moves on with his life and focuses on what matters to him instead of worrying about investing as Wuss Loui did.
After the 10 years of investing Don’t bother Loui’s net worth will be:
Stock portfolio: 2.367.585 DKK
Rate of return: 6,85 %
Don’t bother Loui has doubled his rate of return compared to Wuss Loui.
And it is by doing nothing but investing every single month for the past 10 years.
Don’t bother Loui will almost be financially independent by this stage since his annual spending is 10.000 DKK x 12 months = 120.000 DKK
120.000 DKK / 0,04 % = 3.000.0000 DKK
Say Hello to Smart Ass Loui
Smart Ass Loui differs a bit from both of the others.
He likes the idea of being financially independent but doesn’t like the idea of only owning an index fund.
He likes to act a bit according to the market.
But he does not know that buying single stocks is the same as going to the casino.
He has heard some of the best investors saying the following:
“Be fearful when others are greedy, and greedy when others are fearful”.
The active approach he will have towards his investing is whenever the market is going red, he will invest 1.000 DKK more each month.
He will be creative and come up with solutions on how he can get an extra 1000 DKK/month.
It could be:
- Working overtime
- Selling old stuff
- Taking another job
- Start a side hustle
- Spending less
Whenever the market turns back to normal, he will turn back to investing 10.000 DKK/month again.
The point from when the market is starting to decline, and till it has turned back to normal is called an Underwater Period.
The underwater periods from 2011-2021 are the following:
May 2011: 10 months
June 2015: 12 months
February 2018: 7 months
January 2020: 7 months
In total Smart Ass Loui is going to invest:
36 months x 1.000 DKK = 36.000 DKK
He is going to invest 36.000 DKK more than the other Loui’s.
After those 10 years of investing is net worth looks like this:
Stock portfolio: 2.808.013
Rate of return: 8,7 %
Those 36.000 DKK Smart Ass Loui invested extra whenever the market was down, is getting him more than 400.000 DKK ahead of Don’t Bother Loui.
By this stage, Smart Ass Loui should be less than a year from financial independence.
- Earn as much you can, as early you can.
- Invest every single month.
- If the market is red, invest more.
Smart Ass Loui would be financial independent a year from now, by the age of 31 as a mason.
Being a craftsman is not a person you would think to become financially independent in 11 years from when he started.
Society would like to show us if you want to be financially successful you need to become a lawyer, dentist, or something with a longer education.
If you are an ambitious student, you will be done with your engineer, dentist, or lawyer education as 25-27 years old, and will be close to 2.000.000 DKK behind each one of the Loui’s.
All these three Loui’s spend 20 % more than I do.
For the sake of simplicity, I chose to go for round numbers,.
But if Smart Ass Loui was a real example, I would have been financially independent for a couple of years now.
This post is sponsored by investeringsbog.dk