Anne is writing about long term returns on page 4. I will deal with the shorter term here. It seems like every week there is a problem of overwhelming magnitude on Wall Street. If we don’t act on it, surely something dire is going to happen.
But you know these overwhelming problems often are not that overwhelming. Now keep in mind I am not saying you should pay no attention to Hurricane warnings but the reality is, we often overreact to the short term noise of the day. Take a look at the chart at the bottom.
The failure of the budget fix in the U.S. back in 2013 was pretty big news and pretty scary but it didn’t have much lasting affect on the market or the economy. The same goes for the near collapse of Greece in 2015 and so far, the Brexit vote.
The moral of this story is it is important to keep your head when everyone around you is losing theirs, or as the saying goes, “exercise extreme sloth.” Disregard the volatility and the crisis du jour, sit tight and focus on the longer term picture (see chart to below). But this is hard to do. Morningstar the mutual fund tracking service examined 1,930 mutual funds over 15 years through June of this year. It found that the mutual funds earned one percent more per year than the investors in the funds. How can this be? It’s because investors got spooked at the wrong time and sold out and then, with equally bad timing, got excited again and bought back in. A one percent return over 20 years on a $500,000 portfolio is $110,000. We’re talking real money here.
Jason Zweig the columnist in the Wall Street Journal, has joked that his job in personal finance is “to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself”. There are not that many Real Truths in investing. The ones that are out there are all pretty simple. Here are four from John Authers a columnist in the Financial Times (September 3-4, 2016).
1. Always worry about costs. We don’t know that much about the future but we do know what we are paying for investment advice. Pinch your pennies here.
2. Be humble. The truly smart people know how little they actually know about the future. Rein in your overconfidence.
3. Rebalance. If stocks are zooming higher and bonds are dawdling, go against the grain and peel back your winners and add some to the losers. It is no exact science but ‘reversion to the mean’ does still live on Wall Street.
4. And finally, remember it is all about risk and return. Hindsight is 20/20. We know exactly when we should have loaded up on risk and when we should have cut back. But this is all rear view mirror stuff. Looking ahead is very different. Try to imagine what it would feel like to lose 10%, 20% or even 40% and what this would do to your life plans. Then with this in the back of your mind, invest accordingly. You are less likely to wake up anxious in the middle of the night thinking, oops I didn’t sell down to the sleeping point.