The Five Phases Of Index Investors

March 5, 2018

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THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE READ MY DISCLOSURE FOR MORE INFO.

Today, I thought I’d share how I have evolved as an investor over the years. I haven’t always been a passive index investor. In fact, I’ve made a bunch of mistakes along the way. At times, I was lazy when it came to contributing to my portfolio. I have also tried some harebrained experiments in order to optimize my portfolio.

I figure if I can prevent anyone from making some of the same mistakes, that those mistakes will be well worth it. So without further ado, the five phases of my passive index investing journey.

Phase I: The Naive Phase

Growing up, my Dad would dabble in stocks, but I honestly didn’t pay too much attention. I was too busy running around outside, playing basketball with neighborhood friends. Who knew that I would outgrow basketball and fall in love with the stock market a few short years later?

I remember every evening, my Dad would pull out the business section in the newspaper to check out how his stocks were doing. I remember thinking, how does anyone decipher these codes?

Unfortunately, I was too impatient to trying to learn at the time. So instead of venturing into the stock market, I pushed all my money into my savings account at the local bank, not that I had a ton of money as a teenager to begin with. Even still, my pennies of interest thrilled me each month. I couldn’t believe that I accrued interest just by housing my money at the bank. I thought I was getting the better end of that deal. That just goes to show you how little I knew. 🙂

Learning Something New

Everything changed when I took an Excel computer class during my senior year of high school. I know they teach this stuff to elementary school kids today, but back then, that type of class was new and super exciting.

Our teacher instructed us to pick some stocks to track by creating a table and chart. This was during the height of the dot-com bubble, so virtually every stock was on a tear. When I saw that some companies were doubling over night, I looked at my measly 4% annual bank interest. I realized could make double that in one day through the stock market. That’s when I decided that I was going to learn as much about the stock market and work on Wall Street one day.

Phase II: The Obsession Phase

When I went to college, I decided that I was going to major in Finance and consumed as much as I could about the stock market. I even did crazy things like schedule all my classes after 4 pm, so I could watch the stock market all day.

I barely read any text books. Instead, I spent most of my time learning about the hot new stock trading techniques, like technical analysis. I scoured various charts, trying to understand the Impulse Wave Pattern in the Elliott Wave Theory.

I made some money trading stock options by trading on the volatility of certain stocks. However, I lost one big trade while I was in college and completely lost my appetite for stock options.

Looking back, if I had spent as much time learning what my professors were trying to teach me instead of trying to learn technical analysis, I probably would have graduated with a 4.0 GPA.

A Change of Plans

After I graduated, the allure of Wall Street paled in comparison to staying close to family. I never took a chance on Wall Street, not that I would have been qualified, nor do I think I would have been cut out for Wall Street after reading The Buy Side. If you haven’t read this book by Turney Duff, I would encourage you to read it. It is hilarious, but also heart-breaking, at the same time.

Once I graduated from college, even though I didn’t take a job dealing with the stock market, I talked about the market with whomever I could. I solicited the best tips from all of my friends, trying to figure out what they were trading and what I could do to make a quick buck.

From hearing pitches on penny stocks, momentum stocks, and everything in between, I thought I knew it all. Then, the Great Recession ate my lunch.

Before the market crash, I would talk about all the hot stocks I was buying and how well I was doing. As Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.”

Phase III: The Fall

I got hammered on my stock picks. My friends quit asking me about my investment strategies. Their investments were doing as terribly as mine. I even had a couple of friends ask their grandparents on what they should be buying, since they lived through the Great Depression.

It was a humbling experience. At that point, I knew that I needed to revamp what I was doing to better weather any financial storms in the future. And more importantly, I needed to better handle the emotional toll that the stock market took on me.

While technical analysis had taught me a lot, it wasn’t fool-proof like I had thought. I knew that I needed to stop chasing returns. Plus, I was getting tired of the stock market dictating my moods. I no longer wanted to be controlled by the whims of the stock market.

Phase IV: The Road to Enlightenment

During the Great Recession, I must have read every book that was out there. I learned about dividend investing, the randomness of the stock market, building the optimal portfolio, and the efficient market hypothesis.

I tested each one of these theories by backtesting various portfolios. Then, I created complex formulas to speculate where the market might go in the future.

The formulas were overly complex. I was spending more time than I cared trying to optimize my portfolio. That’s when I finally came to the conclusion that I was working too hard for a return that would barely beat the market. Some people on Wall Street with PhDs that try to beat the market full-time can’t even do it.

I thought about completely jumping out of the market and putting all my money back into my savings account. At least that way I would receive a guaranteed rate of return. Then, a friend recommended that I read The Little Book of Common Sense Investing.

Phase V: Simplicity

The Little Book of Common Sense Investing had me nodding along with each page, as if I had just uncovered the secrets of the universe.

At the core of the book, John Bogle, the founder of The Vanguard Group, describes the simplest and most effective investment strategy to building long term wealth. That includes a buy-and-hold strategy with low cost fees, which mimics broad stock market indexes.

I read this information as if it was revolutionary. I couldn’t figure out why I had been so obsessed with beating the market, when I could have focused on areas that I have more control over, like my savings rate.

So after finishing the book, I totally revamped my portfolio and started contributing my money into the SP 500. I stopped worrying if the market went up or down, knowing that overtime, the market would probably go up. Because my risk was spread over 500 (actually 505) shares in the S&P 500, I didn’t need to worry about getting every stock pick right anymore.

Since that time, hot investments have come and gone. However, I don’t worry about chasing the next great investment. For instance, many people jumped into Bitcoin at the top of the market. I could have probably been one of them as well if I hadn’t altered my investment strategy.

Do I miss the thrill of buying a stock and watching it go up?

Absolutely. But, being able to fall asleep at night and not wondering what the market is going to do the next day is an even better feeling for me.

So readers, do you identify with any of these phases as an index investor? Did I miss anything? Share your thoughts below.

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