My husband and I love to compete, whether we’re playing a board game or racing to see who can get to the car first. Sometimes, we even learn lessons—like the time we tried our hand at trading stocks.
Well, virtually. We didn’t have much money to spare, so we tried the next best thing: We downloaded an app called Stock Wars, a game that lets you test out your investing chops, risk-free. We each started out with a fake “pot” of $100,000 that we could use to buy and sell stocks that mirrored current, real prices on the stock market.
Our mission? Go for one month, and see whose trading strategy netted the biggest pile of cash. Then implement that strategy in real life, amass millions and proceed to world domination.
Our strategies could not have been more different.
The only advice I’d heard about investing was to “buy low and sell high,” so that’s what I aimed to do. I checked my portfolio 20 times a day to look at the prices, trying to sell stocks as they rose and buy them when they were low.
I didn’t account for the trading fees, though. Or that I would get so caught up in trying to sell at the highest price that I’d hold onto some stocks too long and end up watching helplessly as they fell, hoping they would rise again quickly so I could recoup my investment before the bet ended. Mostly, they didn’t.
I realized greed and fear were dictating my actions more than any sort of investing strategy.
By the end of the month, I’d lost my entire starting pot many times over because I got frustrated with all of the money I was losing. I kept hitting “restart”—convinced that the next time I would win! (I never did.)
My husband, completely true to his character, promptly forgot about our game. He made his starting investment in companies he knew and liked—mostly video game and tech companies—and planned on taking a more active approach. But he ended up letting it run in the background for the entire month. (Video games are a distraction, after all).
You can probably guess the winner.
When we came back to analyze how we did, I was shocked to see my husband not only maintained his initial starting pot, he’d grown it by 10 percent. His set-it-and-forget-it strategy—even if unintentional—was clearly the winner over my feeble efforts to game the system.
How is that even possible? What I realize now is that I got caught up in the emotional side of investing, giving in to gut-instinct reactions (that turned out to be mostly wrong) rather than sticking to what I know to be true: It pays to be a passive investor. Not only is it easier—as my husband learned, it takes very little involvement after the initial investment—but you’ll also pay less in trading fees and avoid costly, emotionally driven decisions that arise from trying to time the market. Trying to beat the market is an extremely risky bet, as I learned, that even the pros don’t succeed at much of the time.
Sure enough, we implemented the more successful strategy.
Thanks to our mock investing game, we passively invest our real dollars today. About a year ago, we put about $2,000 into a basket of low-cost, exchange-traded funds, or ETFs—which provides much broader diversification than if we selected individual stocks—and haven’t touched it since.
In fact, I hardly ever check the prices. And you know what? We haven’t lost money—in fact, we’re $121.31 richer.
Of course I know the market could dip at any time. I actually expect it to happen sooner or later. But now that I’m a passive investor, I also know that, historically, the market has always rebounded and continued to grow, and I don’t need to fret or run around like the sky is falling in the meantime. No stock market gaming needed.
March 10, 2017