When I first started law school, one of the oldest and most revered professors visited one of my classes to give this advice: “Often the best thing for a lawyer to say or to do is nothing.” That struck me as funny advice back then. And yet this advice has proven true over and over since I first heard it, in contexts far beyond law. I keep finding time and again that doing nothing often yields better results than anything else.
Get a windfall? Do nothing.
How many times in your life have you reached a new milestone, earned a pay raise, promotion, or bonus, and heard someone say, “So, what are you going to do to celebrate?” Usually the implication is that now at long last you can buy some great thing you’ve been yearning for all the while you toiled away for your new income.
Indeed, a strong cultural expectation exists that you should start diminishing your new wealth as soon as you receive it by either taking on new liabilities like buying a newer/more expensive car (higher car payments and insurance premiums? yeehaw!), a bigger house (more maintenance, fees, and taxes? yippee!), or by spending it treating yourself to more frequent luxuries (personal trainers, massages, fancier gyms, designer coffee, dining out, more subscription services—higher expenses everyday? woohoo!).
This expectation is so strong, and so well-engrained, that even after all of our financial discussions and efforts, after I got a pay raise and a tidy bonus earlier this year, our first instinct as a couple was to ask, how should we celebrate? We’re steeped in better financial thinking and are on a mission to eliminate over $248k in debt in only five years, and yet we initially succumbed to this thinking.
Luckily, our new-found financial discipline paid immediate dividends. We decided to do nothing. And the more I look at this situation, the more I realize doing nothing is the smartest thing to do. Don’t celebrate with a mega party. Don’t buy something new. Don’t adapt to more frequent luxuries. Instead, sock that money away into savings or reducing/eliminating your existing liabilities. Your quality of life will improve by having less stress, nothing else to take care of, and you will be closer to achieving debt or financial freedom. Already financially free? Give the money away to a worthy charity and get the greatest experience of helping another human being.
House value climbing through the roof? Do nothing.
Just because your house or some other asset is appreciating significantly doesn’t mean it’s time to change anything. Changing such a critical baseline, perhaps by using your newfound equity to bankroll a bigger/more expensive place, may sound initially appealing—new is exciting!
The expectation seems to be that we should take advantage of this financial success by selling it, incurring huge transaction costs, and venturing into the unknown. Rebel against this ridiculous expectation by doing nothing! The realtor who helped us buy our house calls every year to let us know how our house value is doing. Who cares what the value did after one year? Unless you’re relocating for a new job, staying in the same house for as long as possible is usually the best bet for stabilizing your housing costs at a point in time long behind you. If you buy a reasonably priced house (for you) when you buy it, inflation should make it easier and easier to afford until the mortgage is paid off and you live for only the cost of property taxes and maintenance. Few things sound more financially appealing than an ever-decreasing cost of living!
Discounting the true transaction costs of making such a significant change in your life is a mistake most people make over and over again. They never get ahead because they continually put themselves back to financial square one with a new car or new mortgage or endless new toys. Instead, do nothing and automatically enjoy a higher standard of living.
The Joneses bought a new Super Widget 7000? Do nothing.
Not trying to keep up with what your social circle is spending money on is another way you can win by doing nothing. I mean, you may say to yourself, how can I honestly sit in my house with a 48″ TV when Mr. and Mrs. Jones just bought a brand spanking new 70″ SmartTV with a curved screen and a remote they can talk to? They are so clearly enjoying their movies at least 50% more! How can I sit here like such a sucker?! Or how about this: Mr. and Mrs. Jones keep inviting us out to these dinners at nice restaurants, it would be so impolite to refuse!
Obvious news flash: if your status in your social circle hinges on whether you can keep pace with the spending habits of the group, rather than being a good friend, these are not “friends” worth keeping. And if your self-worth hinges on whether you have the same toys as your friends, you have some serious self-confidence to build. Whatever it is, someone else always has more, or a better, newer version of it. And your true friends will be just as happy to share a home-cooked meal with you in your house as they will to enjoy the unbelievable luxury of having an army of paid servants prepare your food, pour your drinks, and wash your dishes.
Instead of feeling deprived, feel grateful that your friend is doing so well! Congratulate them on their success. Gratitude is one of the best financial tools you can implement every single day. Then do nothing, and reap the rewards of automatically getting out of debt or becoming financially independent that much sooner.
Stock market crashing? Do nothing.
One last example, and probably the most important, in an area where doing nothing is almost always better than trying to do something. The recent volatility in the stock market seems to have led lots of investors to run around like chickens with their heads cut off. Sell! Buy! Liquidate! Buy gold! Part of the problem is that all these calls to action play into the damned flight-or-fight instinct that gets triggered when we see our money going up or down. Your lizard brain is screaming at you DO SOMETHING YOU MORON. But as many of the best financial bloggers have noted, this mania and call to action is a really stupid idea. But let’s quantify just how stupid an idea flipping out and trying to solve a problem that doesn’t need solving is versus doing nothing.
Jack Bogle (founder of Vanguard) wrote in his Little Book of Common Sense Investing that Vanguard’s total stock market index fund yielded about a 7% average return each year for a ~20 year period. That sounds pretty darn good over such a long period of time, especially with the absolute minimum work required for the investor. Unfortunately, Vanguard investors chopped their actual returns by more than half, earning only 2–3% on average per year over the same period of time. Why? Because they freaked out when the market started to move, selling as it crashed and buying when it was on the rise. These attempts to time the market proved drastically ineffective. If these investors had done nothing, they would have doubled their average return. And what does doubling your average return per year mean at the end of the day? It’s pretty startling. A $10,000 investment earning 3.5% per year (compounded) for 20 years yields a total return of $19,897.89. But at 7%, that same investment gets you $38,696.84. I don’t know what I’d do with an extra $18,798.96 over the same time period for the same initial investment (other than become financially free sooner!), but I’ll be happy to take it, as I’m sure you would too.
Warren Buffett also agrees that once you buy an asset, you should hold it basically forever because that’s how you get the most value out of it. He is famous for saying that his favorite holding period for a stock is “forever.” Berkshire Hathaway never pays dividends and instead acquires ever more assets, reinvesting its proceeds in making those companies better. This has resulted in a 50-year market value increase for the company of 1,826,163%. Not a bad return for doing nothing with what you already own, instead of selling it at the first sign of something better or watching it struggle a bit.
So instead of trying to time the market (get out before it goes down, buy in before it goes up), just stick with your basic investment plan. Keep socking money away every month through the good times and bad, and double your return—all by doing nothing.
What other ways have you found doing nothing is better than more active strategies? Please share in the comments!