This "Magic Trick" Improves Investing Immediately
A mysterious package arrived at my desk one week...
Now, I get a fair amount of reader mail and I respond personally to each one. But this particular package was much heavier than your typical piece of mail, and it was oddly shaped compared to the usual packages I receive.
It was addressed to the “Captain of The Crow’s Nest.”
When I opened it, I discovered a block of wood with three notches cut into it and a nail threaded through a hole in the notches. Here it is:
I was perplexed. What was this item? A puzzle? A craft project? A bizarre threat of some kind?
Confused, I pulled two letters out of the envelope, one of which was sealed.
The first note read:
I thought I should send you something to slow you down. At my age — 97 — I work kind of slow.
After the third day, my ears begin to burn. How did he get that nail in there?
LT COL USAF Ret.
The sealed letter was scrawled with this cryptic message: “Open on the Third Day.”
Ah-ha, so I did have a puzzle on my hands — and I love puzzles. I excitedly developed a few theories, some more reasonable than others.
Perhaps it was a trick nail? I moved it back and forth and it seemed as solid as can be. The top of the nail had not been glued on or manipulated in any way.
Maybe the wood had been cut open and glued back after the nail was inserted. I pried and pulled at the wood, with no movement or signs of distress. There was also a sticker on the front that read: “Look Ma!!! There Ain't No Glue.”
Both the nail and the box passed the sniff test. So what was this magic trick? How in the hell did he get that nail in there?
I was stumped for the first day, so I set it on my desk and pondered it for another day when I started to get somewhere...
I figured if there wasn’t some parlor trick involved, Hal must have manipulated the wood itself. After discussing it with a couple of colleagues who have done carpentry and woodworking, we finally developed our theory.
On the third day, I opened the letter. It verified our theory, and the mystery was solved.
Now, I’m not going to spoil the trick for you here. (If you’re curious, just email me here and I’ll give you the answer, as well as instructions for building your own “trick box.”) But I will say that we were right, the wood had been manipulated — and in a very simple way.
It goes to prove the old Occam’s razor theory: The simplest explanation is usually the soundest.
The same goes for investing...
Most people take a look at the stock market and get downright scared and confused. They see talking heads arguing about esoteric market movements, complicated technical charts, and unexplainable swings up and down and think “God, this is far too complex for someone like me...”
Unfortunately, that’s why many people don’t even bother playing the market. In fact, it’s getting worse: A recent study found that 18- to 29-year-olds are downright terrified of buying stocks.
Roughly 46% of those with more than $100,000 to invest claimed they would “never be comfortable in the stock market.”
Over half of 18- to 29-year-olds said they are “not very confident” or “not at all confident” putting money in stocks for retirement investing.
I can obviously understand the sentiment — there’s a reason millennials are referred to as “recession babies.”
They’ve seen firsthand the effects of a market crash. But if you aren’t buying any stocks for retirement, you’ll be in for a rude awakening if you’re planning on surviving on savings accounts and Social Security...
Truth be told, buying and maintaining a portfolio really isn’t that complicated. It’s not a magic trick.
Once you find out exactly how it all works, it’s as easy as pie.
For instance, if you wanted to diversify your own portfolio with individual stocks, it would take you countless hours of research and diligence in order to build a portfolio that covered all conceivable bases. Not to mention the copious fees for buying and selling that just eat away your profits.
That's why I love index funds.
They’re easy. They’re cheap. They’re diversified. And best of all, they actually beat the returns of most money managers and financial advisors. While these guys are moving around stocks each and every day, a trusty market index is faithfully chugging away, making you easy money while these “professionals” spin their wheels trying to juggle hundreds of stocks.
And while they are juggling, it is costing you a fortune. If you have a financial advisor, they get paid each time they buy a stock. So riding a consistent portfolio doesn't make them any money. All told, the average American spends around $150k over a lifetime on these types of fees.
And while they are just charging you to move paper around, they aren’t even bringing home the bacon. In fact, over the past five years, two out of three actively managed mutual funds failed to beat the S&P 1500 total stock market index.
It doesn’t have to be that way...
You can just buy a fund like the Vanguard S&P 500 (NYSE: VOO) on your own in a matter of minutes and just hold on to it. Here’s how it’s done in the last five years:
That’s 103%. And all of those little Ds? Those are the dividend payouts. VOO currently yields 1.34%.
My favorite is the ProShares S&P 500 Dividend Aristocrats ETF (BATS: NOBL).
Dividend Aristocrats are companies that have raised their dividend for 25 years straight. It’s hard to do — especially in times like this — and I trust companies that have done it that long.
That’s one of the reasons I started The Crow’s Nest: to demystify the market and give you the basic tools to be able to grow your wealth safely and effectively — without the stress of jumping in and out of positions or swinging for the fences on risky stocks that have a good chance of crashing and burning.
Index funds are a step in the right direction. But you can compound your easy gains with one simple plan Crow’s Nest readers have been using for years.
The only magic here is the magic of compound interest. Buy ETFs. Buy dividend reinvestment programs (DRIPS) in companies you know and love. Buy it. Set it. Forget it.
Jimmy is a managing editor for Outsider Club and the investment director of several personal finance advisories, The Crow's Nest, and The Adventure Capitalist For more on Jimmy, check out his editor's page.
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