Stoic Investing: Mastering Your Emotions Will Make You Rich

stoic investing

Stoicism is a philosophy that favors the long-term over the short-term. If we apply that philosophy to investing, it means that Stoic Investing is about putting your money to work today so that you don’t have to work later.

Edward O. Thorp, American mathematics professor, and former hedge fund manager, said it best in his biography A Man for All Markets

“Properly managing investments would better prepare people for retirement and make them less dependent on society during their lifetimes.”

In this article, I’ll share the lessons I’ve learned from Stoic philosophers and from investors who favored the long-term. Stoicism can help you to become a more consistent investor, through the ups and downs of the market. 

Long-term investing is straightforward 

In 1976, John Bogle, the founder of The Vanguard Group, introduced the first index fund. After years of research, and looking at historical returns of more than 180 years (The New York stock exchange exists since 1792), he figured out that owning single stocks is too risky. You’re way better off holding a large basket of stocks as an average investor. 

So he introduced the Vanguard S&P500 Index Fund. This index fund has an excellent track record, and even outperforms the majority of hedge funds since its inception.

Recent data shows that $10,000 Invested on January 1, 2011, in the S&P 500 Index vs. Average Hedge Fund, would result in the following:

  • S&P 500: $36,468
  • Average hedge fund: $15,998

You’d be twice as better off by putting your money in an index fund. This is obviously a massive generalization. 

There are many hedge funds that outperformed the S&P 500. Edward O. Thorpe, who I quoted at the beginning, is actually one of the managers who achieved above-market returns for years. But that’s not the point.

Why isn’t everyone investing?

So it’s common knowledge that putting your money in an S&P 500 Index Fund will build wealth over time. And yet, only 41% of Americans under the age of 35 have direct or indirect investments in the stock market.1Source:

stock market exposure

And at other age groups, it isn’t much better. Merely 58% of people between 55 and 64 are invested in the market. 

In my opinion, everyone should be investing. Why isn’t that the case?

Investing is not about WHAT to do. As we’ve established, experts have shown us that the average person should just put money in an index fund every month. Over a 30-year period, that strategy has never resulted in a loss. And if you’re close to retirement, you want to own more bonds than stocks.

Either way, investing is about perseverance and understanding risk. Without those two things, it’s impossible to be a long-term investor. 

How to manage your emotions during market downturns

Whether you’re a seasoned trader or a retail investor who’s just starting out, investing comes with pain.

Every time you make an investment or trade, you have to deal with the risk of losing money, missing out on major opportunities, and accepting your returns (whether they are positive or negative). 

If you’re afraid of those things, you will make life unnecessarily hard for yourself—especially when there’s a market downturn. During those times, there’s not much you can do to change the overall market. If you’re close to retirement, you can pull out of the market. But other than that, you just have to invest your way through it.

Some investors blame their own judgment or skills when they lose money. They try to find answers in the market. They think they need more study and analysis. But they need to accept that there’s no one to blame.

The Stoic philosopher, Epictetus, talked about how we often blame others for the way we feel. And if we don’t blame others, we blame ourselves. But that’s both wrong. He said:

“When you blame others for your negative feelings, you are being ignorant. When you blame yourself for your negative feelings, you are making progress. You are being wise when you stop blaming yourself or others.

Similarly, when you blame the market or yourself for your results, you’re wasting your energy. If you’re not invested in risky assets and you’ve made the right decisions, you can’t worry about the things that are outside of your control. This is a good way to look at a market downturn. 

Throughout the year, there are always long periods of negativity in the market, which drives prices down. Whether the market is reacting to rising bond yields, inflation predictions, interest rates, or anything else, we must remind ourselves downturns are always temporary. 

inside vs outside investors control

Avoid risky assets that impact your sleep

Stoicism has its limits. If you’re invested in risky assets that plunge 20% on a single day, I don’t think even the most stoic person in the world would stay calm. 

That’s why I avoid putting my money in risky assets that make me lose sleep. When I invest in the S&P 500 index, I don’t worry that the 500 greatest companies in the world will still be around when I wake up. I’m 100% confident the world keeps moving forward and that many companies will do the same. 

But if I hold a big position in a SPAC that I bought at a premium, certain cryptocurrencies, or a meme stock; I don’t feel comfortable. To me, that’s also not investing. That’s speculation. And if you do it with money you can miss, it’s fine. But if you’re counting on that money to build wealth over time, you’re taking a big risk. 

Stay the course

Let’s say you go with a dollar-cost averaging strategy, and you decide to invest $1000 in an S&P 500 index fund every single month. Or maybe you’re a momentum trader who buys stocks when they make new highs.

Don’t diverge if the market sentiment is bad. While Epictetus wasn’t talking about investing when he said the following, you can literally apply this to the stock market right now: 

“Once you undertake to do something, stick with it and treat it as something that should be carried through. Don’t pay attention to what people say. It should not influence you in any way.”

This is of course easy to say. But as long as you understand that you’re not making any risky moves, you have nothing to worry about. 

If we want to build wealth over time, we need to keep investing so we can benefit from the power of compounding. We can’t allow our emotions about short-term fluctuations to get in our way. 

The biggest threat to an investor is to stop investing. I’ve done that after the 2008-2009 crash, and subsequently missed out on one of the biggest bull markets in recent history. Back then, I didn’t know about the principles of Stoicism so I allowed my emotions to get the best of me. 

When the Covid market crash of 2020 happened, I felt an itch, but I remained in the market. I even bought some individual stocks that were on sale—so I ended up putting more money in the market. I learned from Epictetus to stay the course. 

As a Stoic investor, we always need to stick with our plan and carry on no matter what. This is how society is made. And as long it keeps progressing, our investments will too.

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