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  • Eric Hahn

Watching The Market Is Not Investing

How important is it to watch the stock market? Not important at all. Here is advice from two of the best investors I know.

"The stock market is a giant distraction from the business of investing," says John Bogle, founder of Vanguard Groupof mutual funds. Bogle started his career working for an active management company. He was fired from the CEO position in 1974, which led to an Aha! moment and creation of the first index funds available to all investors through Vanguard.

“If the market closed for years, we wouldn't care,” says Warren Buffett, “If you focus on the price, you're assuming that the market knows more than you do.” Buffett is an active investor, and as CEO of Berkshire Hathaway(BRKA), the book value of his company has outperformed the S&P 500 stock index by 9.9% annually since 1965. He doesn’t do it by trying to forecast stock returns. As far back as in his 1959 letter to investors Buffett wrote, “I make no attempt to forecast the general market.”

These two hugely successful and well known experts who are from opposite sides of the investment spectrum both come to the same conclusion – tracking the day-to-day movements of the stock market is nothing more than a distraction from investing.

Does this mean the value of the stock market never matters? I’ve never thought that to be true. There are at times in life when it does require a look.

I believe that an investor who is approaching retirement or in retirement should consider the amount they have saved and then assess their satiation in relation to the value of the stock market. If you’ve accumulated the money you’ll need for retirement, why risk your success by being heavy in stocks, especially if you got there from a bull market and current valuations are high relative to peak earnings?

How much is enough? Once you have saved 25 times annual living expenses - less income from Social Security, pensions, rents and other cash flows - then you have enough. There’s no reason to load up with risk just to try and earn a little more. Diversify into a conservative portfolio of low-cost stock and bond index funds and be done with it all.

That being said, there are situations when having more equity makes sense even in retirement. If you’re fortunate enough to have more money than you’ll ever need, then you’re really investing for the next generation and beyond. Having more stocks is fine if you have the money to do it. This is the way Buffett sees it, and he is recommending a high amount in stocks for his family when he is gone.

Ironically, Buffett suggest doing this using index funds in part. According to the 2013 BRK annual report, his advice to the trustee of his wife’s cash inheritance is to, “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)” John Bogle likes this advice!