Big Cajun Man published an amusing list of “frustratingly correct” answers to financial questions. Some of these questions and answers illustrate nicely that most people have the wrong ideas about financial goals.
The big man’s first question and answer:
Question: When is the best time to sell my stock?
Answer: When it reaches the highest price.
One criticism of this answer is that it offers no prescription for how to determine when a stock is at its highest price. But, apart from this, the answer is correct for active investors who try to beat the market. This is the way most people think about investing.
However, the majority of active investors must underperform the market. We see this play out year after year. The vast majority of investors would benefit if they stopped trying to beat the market either by themselves or by finding an advisor or fund managers to try to beat the market for them.
For investors who embrace passive investing, the first answer to the question of when to sell a stock is that they don’t own individual stocks in the first place. They tend to own low-cost broadly-diversified ETFs and mutual funds.
If we ask passive investors when they should sell their funds, the answer is when they need money or need to rebalance their portfolios. The answer “When it reaches the highest price” is incorrect to a passive investor.
The next question and answer:
Question: Any tips on how to win the lottery?
Answer: Yes, buy the winning ticket.
Once again, this answer offers no prescription for how to pick a winning ticket, but to lottery players, this seems like the correct answer. However, for those who have figured out that lotteries are a terrible deal, this answer is wrong. The real answer is that you win the lottery when you don’t buy any tickets.
I quite liked the final question and answer:
Question: Is there such a thing as good debt?
Answer: No. If you owe money, you owe money, which is bad.
As I’ve said before, there can be good reasons for going into debt, but the debt itself is still bad. This mindset can help people keep their debts to a minimum even when they go into debt for good reasons.
Overall, I find that even among investors who claim to have embraced indexing, the majority still think about jumping in and out of the market in misguided attempts to avoid market declines. They still think the correct answer to when to sell is when prices are at a maximum. True index investors are still rare.