Cookie Sales Are a Good Thing
In The Beginner’s Guide to Investing – Part 4, we discovered how wonderful passively managed index funds are when it comes to buying a lot of cookies at a very low price.
But we learned in Part 2 that, unlike our savings account, our investments are going to go up and down in value…a lot.
When things are going up, it all looks and feels so easy and wonderful.
But when things are going down, it can feel tricky and complicated and scary very quickly.
Passive index funds are designed to do as well as the index they’re tracking.
Being somewhat boring and dumb, they just ride along with the market. If the market is doing well, the index fund does well. If the market is crashing, the index fund is crashing.
Uh…Crashing Doesn’t Sound So Good
Crashing isn’t good, but it’s the reality of the market, and a reality of investing.
It will go up and it will go down.
The important thing to understand about a market that’s going down is that it’s only a bad thing if we need to take our money out.
If we can leave our money alone and ride out the storm, we’re in a great place to come out in a much stronger position on the other side.
Wealth is largely built, not by timing the market just right, but simply by the number of cookies we own.
In fact, if we can continue buying more cookies while the market is crashing, it’s like buying cookies that are on sale.
And when we buy cookies on sale, we get more cookies.
Sounds Interesting, But I Need an Example
Let’s say we bought 10 cookies at $10 each. That means our cookie portfolio is worth $100. (10 x $10)
At the current market rate, we’ll need $10 to buy one more cookie.
But let’s say the cookie market starts tanking and the value of our cookies drops by half, all the way down to $5 a cookie.
Now our cookie portfolio is only worth $50. (10 x $5)
Oh no! That sucks. We just lost half our money!
If we think about it, as long as we don’t sell our cookies, we haven’t lost anything.
The value of our cookies has definitely decreased, but that’s really just on paper (or on a digital screen these days). We don’t actually lose that money unless we sell at the now much lower price than what we paid.
But more importantly than not losing any real money, we haven’t lost any cookies.
We still have 10 cookies.
The value has changed, but the number of cookies we own hasn’t.
Being the smart cookie that we are (so sorry – it was right there), we buy 2 more cookies for $10.
After some time, maybe even a few years, the cookie market starts coming back and eventually cookies are worth $15 each!
If we did nothing at all but hold onto our original 10 cookies, our portfolio would be worth $150. (10 x $15)
That’s better than when we started, and for doing nothing but not panicking and selling our cookies at a loss.
But we didn’t just sit by and do nothing. We bought two more cookies during the awful Cookie Crash of 2019, so we actually have 12 cookies.
That means our cookie portfolio is worth uh…12 x 15….uh….math is hard…$180 dollars!
Because we were able to avoid selling any cookies at a loss during the cookie crash, AND we were able to buy more cookies at a discount while the market was down, we came out even better than if we had done nothing.
The truth is that fortunes are made during market drops and economic downturns, not when everything is going great.
The key is to be in a financially healthy place where we can weather the storm without freaking out and selling our cookies at the wrong time.
So Crashing…is Good?
Good is a strong word. Market ups and downs are just normal.
As long as we’re diversified and don’t sell when the market is crashing, our portfolio will simply get bigger and bigger and bigger over time.
And if we have the money available to buy more cookies when they’re on sale, our portfolio will grow even faster when the market comes back.
Our Secret Investing Weapon: Automation
Now that we know what type of cookie variety packs to buy (passively managed index funds), how do we know when to buy?
The simple answer is as often as possible.
The easiest way to do that is to set up an automatic investing plan. This just means setting up an automatic purchasing plan so that every time we get paid, a portion of our money is used to buy cookies.
The most popular version of this is our 401k plan at work.
Money is taken out of our paycheck automatically to buy cookies inside our 401k. This happens every time we get paid. We set it up at the beginning of the year and don’t have to think about it after that.
When I started my last job back in 2006 I set up my 401k so that every two weeks when I got paid, a portion of my paycheck went to buy cookies.
And it stayed that way all the way through 2008, 2009 and 2010 when the economy was crumbling.
It turns out that every two weeks I was just buying cookies that were on sale.
In 2011 when the market had recovered, I had a lot more cookies than I had back in 2008, and by the end of 2012, it was clearly visible in the value of my investment portfolio.
It wasn’t that I was a genius or some super smart investing guy. I was just consistently buying cookies every two weeks when a lot of people sat on the sidelines too afraid of losing money.
I lost money during those years too (on paper), but I was in a place financially where I didn’t need to sell any cookies, so I could just ride out the storm and keep buying more.
Over a 10, 20 or 30-year working career, sometimes we’ll buy cookies while the prices are rising, and sometimes we’ll buy cookies when the economy is struggling and they’re on sale.
It’s no use trying to guess when those big market swings are going to take place, so just ignore them.
Keep buying cookies all the time, like clockwork, over the course of many years.
Eventually, you’ll end up with a whole lot of cookies.
You now know everything you need to know to start investing. In fact, you know a whole lot more than I did when I started investing.
Over these past 5 lessons, we’ve learned…
- there are several different kinds of investment accounts.
- investment accounts are not investments. They are just cookie jars waiting for us to buy investments (cookies) to put inside them.
- Investments should be diversified. We should own lots and lots of different kinds of cookies.
- mutual funds are the pre-packaged cookie variety packs of the investment world.
- price matters. The cheap cookies (passively managed index funds) are actually better than the expensive (actively managed) cookies.
- the best time to buy cookies is as often as possible.
I know that’s not everything. You probably feel like there is still so much more to learn, and there is.
But if you’re willing to do some research and keep reading blogs like this, you’ll be able to figure out what you need to know as you need to know it.
Personally, I’m not really a math and numbers guy, but I also have trust issues when it comes to other people telling me they can manage my money well.
I want to have some knowledge so I can better understand how honest they are being with me.
It turns out, with a reasonable amount of knowledge, I’ve been able to handle all of our investing on my own because it turns out, investing isn’t that complex.
Start with your work 401k. It’s a quick and easy place to buy cookies every time you get paid.
If your company matches your contribution, that’s a great deal because you’re getting a 100% return on your money right from the start.
Your employer is buying you more cookies!
Take advantage of that!
And look for low cost index funds as your go-to investment. There are lots of them out there, but something as simple as an S&P 500 Index fund is a great starting place.
Finally, just get started.
You don’t have to be an expert and know everything right now. The key to building wealth through investing is giving your investments time to increase in value.
That takes time.
Sometimes a long time, so waiting until you know it all, or even until you feel really comfortable is often just wasting time.
All the mistakes you’ll make in the beginning won’t mean much in 15 years.
You’ll just be happy you started.