Finance

Really, Please, I’m Begging You, If You Ever Want To Get Rich, Do Not Leave Your Savings In Cash

Many laypeople are surprised to learn that lawyers can make it all the way through law school without learning even one damned thing about investing.

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As the stock market plunged during the opening days of the pandemic (but before widespread lockdowns swept the nation), I inserted myself into a conversation taking place in the lunchroom at our law firm.

“I’m pulling it all,” said a lawyer older than myself who should have known better. “This is crazy, there’s no telling how low the stock market is going to go. My 401(k) balance can sit there in cash.”

“Me too,” said another aged legal practitioner. “I’ll get back in when it hits the bottom.”

“Don’t try to catch a falling knife,” I interjected, as I steeped my green tea. Everyone looked at me like I’d suggested we replace the countertop coffee with black tar heroin. I tried to explain to my colleagues how nobody ever succeeds in timing the market and if they do it’s only because they got insanely lucky and irrationally attributed that luck to skill. This conversation didn’t go very well.

Many laypeople are surprised to learn that lawyers can make it all the way through law school (not to mention decades of their careers) without learning even one damned thing about investing. Somehow those two worlds are inextricably linked in the minds of the public, despite the fact that there is not much overlap in that Venn diagram. I’ve found lawyers might have more money to begin with compared to anyone else in any other profession, but they are no more likely to be better at managing it.

In only around a month’s time at the outset of the pandemic, the stock market lost about 30% of its value. Then it went right back up again, very quickly, and went on to hit a bunch of record highs for well over a year. A lot of people who took their money out of the stock market missed a lot of those gains.

Of course, there is no way for those people to know this. Your investment account only shows you the returns you actually got; it does not show you what kind of returns you would have hypothetically realized if you had simply left your investments alone. The people who put it all in cash probably actually felt smart, and probably think the lower returns they achieved are better than the returns of someone like me who just stayed in and kept making the exact same uniform periodic investments I always make. People don’t usually pull out their phones and compare rates of return.

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I’ve been having many conversations at the law office similar to the one I was having in the lunchroom three years ago. 2022 ended badly for the stock market. Although January saw some decent gains, the pessimism out there is pretty calcified. People really do find it hard to accept that how you generally feel about things should have no impact whatsoever on your investment strategy.

I’m probably not alone in my frustration with the attitude of the typical smalltime investor. A new survey found that almost two-thirds of Americans report a preference for leaving their savings sit as cash right now as opposed to enduring the inevitable swings of the market.

That is bad. Usually when the stock market makes a big recovery, the bulk of the gains can be attributed to just a handful of good days. No one knows which days these will be in advance, and missing them can be very costly.

For example, research from J.P. Morgan Asset Management found that the annualized return of the S&P 500 over the past 20 years has been 9.7%. However, an investor who missed out on just 10 of the stock market’s best days during that period — 10 days over the course of twenty years — would have had an annualized return of only 5.5%.

Human beings like to feel like we have agency. We like to believe that our choices matter. We crave certainty; surely our decisions are better than those of our peers. The trouble is, sometimes we are way better off recognizing the things that are out of our control and accepting that the best course of action might be to do nothing at all.

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You are not going to go wrong with frequent and uniform automatic investments into a low-cost stock market index fund, one that you do not tap into for as many decades as you can afford not to, regardless of what’s happening in the news and irrespective of how you feel at any given time. Unless your net worth is well into eight figures, that’s not only all you need, it’s also probably the best way to keep yourself from leaving money on the table while investing. And I’d be happy to defend that position in the lunchroom of any law firm in the country.

Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at jon_wolf@hotmail.com.

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