3 Imminent Threats To Your Investments (not COVID-19)
March 12th, 2020
Investment plans must be inspired by your goals for the future, and constructed with principled investment strategies and evidence for what works in investment management. Not on a hunch, or on what pays a broker the highest commission. This in essence is the difference between a fiduciary financial professional and a broker, who does not have to put your best interest first.
There are many behavioral anomalies that investors fall into – market timing, active management, and forecasting are just a few of these. But they all originate from the two polar emotions of fear and greed. To be a successful investor over the long run, you have to manage both, and operate from a set framework for investing, and an unwavering focus on the long run objectives.
KEEP THE BIG PICTURE IN PERSPECTIVE
1.The Failure of Forecasting
Market forecasting is quite simply a game of chance where the odds of success are minuscule for even the best investment professionals. If the odds of correctly forecasting a market event for the best investment professionals are so small, what chance does the individual investor have? Well individual investors and professionals alike cannot forecast where the market is likely to go, and we have mountains of evidence supporting the poor track record of those why try.
2. Market Timing Is A Failure
Market forecasting has been a failure, and market timing has an even worse record. Trying to time the market as a result of Brexit for example would have saved you money immediately after the results came in, but cost you a great deal in the period after that, as markets rallied. The same would have happened after the election of President Donald Trump when everyone was so sure the market would collapse and never recover, as one noted economist stated. He was wrong, as were most prognosticators, or market timers, because regardless of one’s politics, timing the market is a loser’s game for all.
Timing the market is sure to lead to disastrous consequences. Market timers have to guess when to get out, and then when to get back in. The odds of making one of these decisions correctly are already minimal. The odds of making both of these decisions correctly are virtually zero. Watch these two videos to see the evidence for the problems with market timing all over the world.
3. Don’t Let Your Behavior Keep You From Financial Freedom
One of the greatest consequences to investors of allowing their emotions to control their financial decisions is that for many they choose not to invest at all. What I will say is that part of the wealth inequality debate must come back to individual behavior when it comes to money, debt, and investing.
Managing investor behavior is possibly the greatest role of a financial professional. While the academic evidence clearly shows that passive investors will outpace their active counterparts, those who fail to manage their behavior will find themselves being outperformed by disciplined active investors who follow a consistent strategy and do not engage in market timing. So controlling your behavior as an investor and not listening to market pundits, forecasters, or market timers, is key to succeeding over the long run. For many the belief that they can beat the market becomes a game, but a very expensive game it is.
So while many investors will be looking to call a top, or wondering if now is the time to take some profits, the correct answer is likely NO. Unless it is a pre-planned part of an investment policy statement, or a strategic action for a retiree, there is no need to make behavioral errors here that could cost you dearly in the long run.
I recently had a conversation with a 30 year old gentleman who was wondering if this was the top. He told me he thought that now was a good time to take some profits. To which I replied, “Can I have access to your crystal ball?” He looked back puzzled and asked “What do you mean?” I responded that considering that he is 30 and will not need the money he has invested for retirement for another 35 years or so, it is completely irrelevant to his long term plan whether this is the top or not. Surely the record of history is that over the long run the direction of stocks, of business, of America is higher, better, stronger. You simply have to accept that we do not know the immediate future. As much as that annoys humans, it is a reality we all must face when it comes to investing. We must stay focused on the long term goals and plan for those eventual realities.
You will have to send your kids to college. You will hit retirement age and have to replace your paycheck. These are eventual realities, and being preoccupied by current events, especially when those goals are 20-30 years away, is immaterial. Let’s focus on what we can control, our asset allocation, our cost, our behavior. That’s how we win the long term game of investing.
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” -Peter Lynch
“It’s not that we’re dumb. We’re wired to avoid pain and pursue pleasure and security. It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right-but it’s not rational.” -Carl Richards, Author The Behavior Gap
So more important than what you are investing in, is how you choose to behave towards your investments. Which brings me to a great article from the Motley Fool. In it they describe that 99% of investing is doing nothing; I couldn’t agree more. Do not react to the article you read that stocks are topping out, nor should you react to the talking head on financial news who tells you to buy now. Investing is about following a disciplined, principled strategy that you do not waver from.
The Warren Buffett quote below summarizes the core of my investing philosophy. Investing is simple, yet it is not easy for most investors over the long run. Managing your behavior is the absolute most important thing you can do to achieve success in the world of investing. If you cannot do this on your own, you may need the help of a fiduciary financial advisor. Just make sure you are seeking out a fiduciary on all your accounts, not just retirement. The recent fiduciary rule only requires advisors to be fiduciaries when managing retirement accounts.
Finally, If you are searching for your own framework then there is none better than the tireless advocate of the average investor, John Bogle. His decades of wisdom in the investment business create a wonderful framework for investors to follow. I end this piece with his wisdom: it is simple but not easy to stick with when the market’s violent moves hijack your emotions. Yet those who can follow it through their investing lifetime will most surely win the game of investing.
Invest you must. The biggest risk facing investors is not short-term volatility but, rather, the risk of not earning a sufficient return on their capital as it accumulates.
Time is your friend. Investing is a virtuous habit best started as early as possible. Enjoy the magic of compounding returns. Even modest investments made in one’s early 20s are likely to grow to staggering amounts over the course of an investment lifetime.
Impulse is your enemy. Eliminate emotion from your investment program. Have rational expectations for future returns, and avoid changing those expectations in response to the ephemeral noise coming from Wall Street. Avoid acting on what may appear to be unique insights that are in fact shared by millions of others.
Basic arithmetic works. Net return is simply the gross return of your investment portfolio less the costs you incur. Keep your investment expenses low, for the tyranny of compounding costs can devastate the miracle of compounding returns.
Stick to simplicity. Basic investing is simple—a sensible allocation among stocks, bonds, and cash reserves; a diversified selection of middle-of-the-road, high-grade securities; a careful balancing of risk, return, and (once again) cost.
Never forget reversion to the mean. Strong performance by a mutual fund is highly likely to revert to the stock market norm—and often below it. Remember the biblical injunction, “So the last shall be first, and the first last” (Matthew 20:16).
Stay the course. Regardless of what happens in the markets, stick to your investment program. Changing your strategy at the wrong time can be the single most devastating mistake you can make as an investor. (Just ask investors who moved a significant portion of their portfolio to cash during the depths of the financial crisis, only to miss out on part or even all of the subsequent eight-year—and counting—bull market that we have enjoyed ever since.) “Stay the course” is the most important piece of advice I can give you.”