Invest in Index Funds to Reduce Your Money Stress

A ton has been written on why you should invest in index funds instead of individual stocks or actively traded, expensive mutual funds. But I’d like to add a point that I don’t think is typically given.

You should invest in index funds to reduce your cognitive load and background stress.

When I invest in individual stocks it’s exciting, especially if it starts going up. But here’s the rub, even if it’s going up you have to ask yourself:

  1. Is it going up faster than the market?
  2. Would you still invest in the company at this price?

Now I’m all about keeping investments forever if you have Warren Buffett’s skill. But the majority of us make a wrong bet every now and again. So what do you do? Keep the stock? Sell it and worry that you’ve missed out on more upside? All this eats up precious thinking time and creates stress.

The opposite is true when a stock goes down.

  1. Is it going down faster than the market?
  2. Is it more sensitive to downturns? Or has it been oversold?
  3. Should I buy more and average down?

These questions contrast greatly to when anything happens if you’re properly diversified in index funds. If the index goes up or down all I ask is:

  1. Is my allocation right?
  2. Do I still believe in capitalism?

That’s it. If you invest in index funds and think capitalism is the best system we’ve invented so far then you just re-balance when you need to and leave everything else alone. You don’t have to worry about losing everything, you don’t have to try and be smart. You just have to believe that companies will continue to exist and consumers will continue to buy. If that continues to happen then new companies will be added to the index as old ones struggle and fall off and the money will keep moving around the world based on markets. Value will be created and just as it has in the past 100 years the stock market will continue it's generally upward trend.

However, if you really feel you have an edge and you need to pick stocks then limit it to a small percentage of your total portfolio (5-10%) and if you grow it great, but if you lose it you're done. No more. Stick with the market, it's not sexy, it makes boring cocktail conversation, but that's what you want. Get your thrills somewhere else!