Why I Invest in Index Funds to Maximize Returns While Avoiding the Risks of Trying to Beat the Market

Karl Steiner

United States
Index Funds
Long-Term Investor

Who are you and what’s your story?

I’m Karl Steiner and I run the website Mindfully Investing.  I was originally born and raised in Maryland but now live in Washington State.  I am a decidedly amateur investor, and any suggestions I make on my website should not be taken as directions on how you “should” invest.  Instead, I encourage my readers to figure out investing for themselves using the four cornerstones of mindful investing: rationality, empiricism (evidence-based), patience, and humility.

I fully retired at the age of 52 as a partner in a medium-sized environmental and engineering consulting business.  It was through this business that I slowly accumulated enough money to start seriously investing in the year 2000, and I’ve been investing ever since.  I undoubtedly made a lot of investing mistakes along the way, which led me to the investing philosophy that I espouse on my website today.

What do you invest in and why did you start investing?

I started in 2000 by investing in individual stocks.  This was right when the dot.com bubble was bursting.  In fact, my first decade of stock investing coincided almost exactly with the “lost decade” for stocks.  In other words, I learned a lot of hard lessons and essentially made zero return for many years, like just about 99% of stock investors in that period.

It’s amazing that I even stuck with stock investing, but that is one of the most valuable lessons I learned, which is that investing is a long-term game.  History shows that if you buy and hold stocks for more than 10 years, there’s only about a 10% chance that you will lose money.

I also found through that difficult experience that picking individual stocks is more like gambling than investing.  It turns out that most individual stocks are long-term losers, it’s only the market as a whole that goes up most of the time over decades.

Source: Longboard funds

Evidence shows that almost no one can “beat the market” by picking individual stocks, even professional experts.  Today, I invest in stocks through a moderately diversified set of low-cost index funds, which is clearly the best way to maximize returns while avoiding the fear and greed trap that comes with trying to beat the market. 

My website provides copious evidence supporting all my assertions here.

Walk us through your process of identifying and executing on investment opportunities?

As I detail on my website, stocks are clearly the best of the commonly available investments.  Although stocks can be volatile, they have always increased in value over the long-term, and stocks go up about 70% of the time.  And the nominal long-term historical annualized return of stocks has been around 9%, which surpasses every other readily available asset.  

While historically bonds have offered some benefits to a diversified portfolio, bonds are at the end of a 40-year bull run that was completely unprecedented.  Now that bond yields are at historic lows, bonds offer dismal potential future returns.  The best predictor of a bond’s future total return over its duration is its starting yield.

Source: Research Affiliates

For example, the current yield on a ten-year U.S. Treasury bond is less than 1%.  This means that buying such bonds today is essentially guaranteeing an inflation-adjusted loss on your investment for about a decade, or an even more severe loss if you sell early.

The key to stock investing is buying-and-holding for the long-term.  You have to be able to handle the fear and greed that you’ll feel as the markets routinely boom and bust.  My philosophy is all about using mindfulness to calm our emotions and avoid making counterproductive investing decisions like panic selling in a crash.  If we can approach stock investing mindfully, most of the so-called “risks” of holding stocks turn out to be harmless phantoms. 

Since you first started, what have you learned that has had the biggest impact on your success and the growth of your portfolio?

As I just mentioned, my biggest lesson learned was to buy and hold low-cost index funds for the long-term.  That means holding for at least 10 years, but ideally, it means holding those investments forever.  Or more practically, hold stocks until you absolutely need to spend that money, such as when you start retirement.

Warren Buffet has said that stock investing is simple, but not easy.  It’s simple because all you have to do is buy and hold low-cost index funds, perhaps moderately diversified by stock type, size, and/or country.  But investing is not easy because stocks constantly confront you with an emotional roller coaster ride.  Most investing advice you see suggests avoiding emotional mistakes by adding lower-return and less volatile assets to your portfolio.  The prime example is to add intermediate-term bonds, for example in a portfolio of 60% stocks and 40% bonds.

The assumption behind this conventional wisdom is that you are too uncontrolled or emotionally immature as an investor to actually understand and handle your emotions and that there’s no way to change that.  But mindful investing is about using meditation and mindfulness practices to improve your emotional control and tackle the hardest part of successful investing.  I offer a lot of reasons and stories on how and why gaining better emotional control is within the reach of just about everyone, investor or not.  

What books, platforms or resources do you use for investing?

Because investing is simple, you don’t need much in the way of tools.  If I only invested and didn’t blog, I would use no tools other than an individual investing/brokerage account.  (One with no trading fees is ideal.)  I don’t need to identify opportunities because the only opportunity that matters is investing in the entire stock market.

That said, the most important book that led me to my investing philosophy is Winning the Loser’s Game, by Charley Ellis.  He never mentions mindfulness, but essentially came to the same mindful conclusions years before I did, just through sheer rational thought, analysis, and determination.

Probably my second favorite book is by Rick Ferri, called All About Asset Allocation.

My favorite blog is by Cullen Roche, called “Pragmatic Capitalism”.

What advice would you give to someone who’s just starting out in investing?

My best advice to a beginner is never suppose that you’re smarter than everyone else or that you’ve figured out an angle that no one else has.  There are millions of people over hundreds of years playing at this game, and everything you can think of has been tried or is being tried right now.  

Or as Charlie Munger says, “know your circle of competence”.  So, if you are a beginner, your circle of competence is exceedingly small.  There are a million ways to lose money by investing and only a few tried and true ways to successfully make money over the long-term.

Ideally, investing is simple and boring.  Buy some low-cost stock index funds and essentially forget about them for 10 years.  Mostly ignore the market news and routine gyrations.  If you’re still excited about your investments a month after you started, you’re doing it wrong.

Of course, there are a few other boring details that you also have to work on regularly.  But once you learn those basics, they’re super simple too.  The main regularities of investing include: investing new money as soon as it becomes available, cost minimization, tax minimization, rebalancing, and reinvesting income and dividends.  My website has primers on all these routine aspects of investing over time.

Can you share a story about an investment opportunity that you passed on and went on to grow beyond your expectations?

I think the question is misguided because it feeds the hopes of novice investors that they might pick the next golden goose.  Too many people start investing as some kind of “get rich quick scheme.”  Investing is about getting rich slowly

Sure, I thought about investing in Amazon in 2000 and passed.  But who’s to say I would have had the discipline to actually hold onto the stock when it subsequently lost 90%(!!!) of its value before slowly recovering again?  (Note this was before I started meditating.)

These kinds of stories always sound good on paper, but living it in real life is a universe away from the nostalgic daydreams of investing riches.  My experience is that the imagined combination of circumstances that would have led to the “amazing win” never actually would have worked out that way for 99.99% of investors.  So, why consider such fantasies?

Where can readers go to learn more about you?


@mindfullyinves1 on Twitter

Thanks to
Karl Steiner

 for doing this interview.

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