To survive, species in the natural world have evolved ingenious strategies. One such strategy, the strength in numbers principle, has been employed by many species to increase their chances of survival against predators, environmental challenges, and resource scarcity.
Think about the David Attenborough documentaries you have watched; the scenes of vast herds of wildebeest migrating across the Masai-Mara, the hypnotic sight of a shoal of fish swimming in perfect unison to evade predators, or the mesmeric murmuration of starlings as they roost for the night.
Individually, each animal might fall prey to a lurking predator, but together, they form a formidable force, making it challenging for predators to single out a target. This collective behaviour not only enhances their chances of survival but also allows them to capitalize on shared resources and information.
Applying the Principle to Investing.
The strength in numbers principle is about leveraging the power of a group to enhance survival prospects. This principle can be adopted in the world of personal finance too, particularly for how you invest your pension or Share ISA.
Investors seek different strategies to generate returns; some believe they can beat the markets by timing the high and low points. Others, like a horse-racing punter, pick stocks they believe are going to soar providing them with a nice profit.
I define these two approaches more as speculation; they may win but they may lose, and there is plenty of evidence it doesn’t work for most people, most of the time. Speculating with money you don’t need is fine, the problem with speculating with money that you are going to rely on in the future is that the cost of being wrong is high. It may not be fatal but it may give you fewer options and less freedom than you hoped for in retirement. In the wild, such a high-stakes gamble doesn’t work from an evolutionary perspective.
The ‘strength in numbers’ equivalent in investing is index investing. Rather than taking larger bets on a smaller number of companies in a portfolio, index investors invest in every company in a stock market, such as the FTSE100 or S&P500. They accept that they don’t know which companies will succeed or fail over the long term; there are too many variables and the future is too uncertain. History teaches us that, Like the T-Rex, there are many examples of once-dominant companies that no longer exist, or at least aren’t as powerful. By investing broadly index investors are guaranteed to hold the winners of today and tomorrow.
The Wildebeest Analogy: Perpetual Progress
As with the perpetual progress of migrating wildebeest, investing in a broad market index allows investors to spread their risk across a diverse array of holdings whilst enjoying the upward trend. Sure, there will be times when the value of their investments fall, but like a drought on the savannah, even if one or two individuals can’t survive, the herd continues. A diverse portfolio that falls in value is not ruinous, unlike a portfolio concentrated into a handful of shares that all fail.
As the saying goes: “Don’t invest in something that you can make a killing from, or be killed by.”
The Ant Analogy: Efficiency and Collaboration
Ants are remarkable. These tiny insects work tirelessly together, each playing a specialized role, to achieve common goals such as foraging for food, defending the colony, and caring for their young.
In much the same way, index funds operate with a focus on efficiency and clear purpose. Instead of relying on active management and attempting to outperform the market, index funds pursue a passive investment approach. By tracking a market index, index investors eliminate the need for extensive research and decision-making, reducing costs and minimizing the potential for human error or hubris.
The Honey Bee Analogy: Sustainability and Long-Term Growth
The intricate structure of a beehive is a reminder of the importance of patience and long-term planning. Bees diligently work together to build and maintain their hive, ensuring the sustainability of the colony. This collective effort allows them to thrive in dynamic and ever-changing environments.
Instead of chasing short-term gains or attempting to time the market, successful investors adopt a patient approach, allowing their investments to grow steadily over time. They know the cost of long-term gains is short-term pain but through regular contributions and the power of compounding returns, index fund investors can build a solid financial foundation for the future.
In nature, the strength in numbers principle has existed as long as species have inhabited the planet, enabling species to adapt, survive, and thrive in diverse ecosystems. Similarly, investing in index funds harnesses the collective wisdom of the market, offering investors a reliable and time-tested approach to building wealth.
By embracing diversification, efficiency, and long-term thinking, index fund investors can navigate periods of economic uncertainty and market turmoil with patience and discipline. Much like the coordinated efforts of species in the natural world, the collective power of index funds enables investors to achieve their lifetime priorities.
Photo by Fengyou Wan on Unsplash
