If you read anything about the markets or investing this year, make it this article.
There has never been a more important time to understand how you’ll need to react to a volatile year to preserve your family’s wealth.
There is a philosophy by which experienced and disciplined portfolio managers live that may preserve your retirement date.
If January is any indication of how the markets will fare the rest of this year, then we’re in for quite the gut check. The fed is expected to tighten its policy, wages are barely keeping up with inflation which puts pressure on the economy, and company valuations slide to levels with which few are comfortable.
All of these topics make headlines, and you start to see legions commenting about how it’s getting ready to fall apart.
Prior to conducting an op, good military leaders consider their contingencies if things go sideways. Thinking through scenarios that could go wrong prior to them happening allows them to create a plan so that they are mentally prepared for when it counts.
Imagine for a moment that you watch the markets fall 15%, settle for a few of months, then tumble another 10%.
Will you be ready to get back into the markets after having experienced a 25% drop? How can you be sure it won’t fall another 20%+ from there as well? Bear markets lose 36% on average, historically.
Market drops are often like cliff-jumps; they’re sudden and fast. Bull markets are more like climbing Everest; a slow and grueling challenge, often doubting whether it’s time to just get off the trail.
But there is a successful approach to investing that has been proven time and time again.
If one can’t train themselves to have the right temperament and be philosophical about market fluctuations, then in the words of Charlie Munger of Berkshire, “…you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to [those who do].”
Feeling the burn
The markets this year have tested that very temperament and philosophical foundation of federal employees across the country.
Some of you reading this may have considered reducing your C, S, and I fund exposure in your TSP in favor of the “safer” F and G funds.
This leads us to a conundrum: it’s not finding the sell-off, it’s being right twice – when to get out and when to get back in again. This is something that has challenged Nobel-prize winning economists for decades—how can you properly time the markets?
Over the last 20 years, roughly 75% of stocks’ strongest days in the markets were during bear markets. Read that again.
There are experts saying markets are overvalued, we need a correction. Perhaps, but that isn’t planning, it’s forecasting—using historical/current trends, and assumptions about future trends, to predict potential outcomes.
The problem occurs when we try to make an investment policy out of forecasts — “actively” getting out of equities to gain favorable pricing.
I’m tempted to say here that it never works. But that’s not true.
Feeding the emotion
It does work, in the same way that someone wins at casinos sometimes. It pays off just often enough to delude the player into thinking that he can keep winning.
But we all know how this works: if he stays at the table long enough, not only does the house win back the winnings—the house wipes him out.
Trying to gain a consistent timing advantage over the markets can’t be done. It isn’t even investing; it’s speculating. Here, speculating on the possibility that you can be consistently right twice over a relatively short period of time. The chances of your successfully executing this are hugely prohibitive.
When you consider trying to time your investments just as that—speculation—you begin to realize that it isn’t something one ought to do with their core capital.
You’re not seeking long-term accretion of intrinsic value—which is the very definition of investing—rather trying to gain an edge from a temporary interruption of the relentless rising trend of equities.
You’re not an investor with strong philosophical convictions, you’re just a day-trader.
We know that the downward trend on which you’re betting cannot last; that having gotten out of the markets you must also then get back in again or forego the achievement of your future goals.
Fear and greed are two of the biggest emotions that drive us as humans—as investors. Is a gambler on a winning streak so insightful about his decisions that he’s continuously creating his success? Or has his gambling behavior taken over where choices are driven by greed and fear? Likely the latter, notwithstanding that counting cards in blackjack can sometimes be done—but I digress.
There’s science behind building a portfolio but participating in its compounding over your life without cannibalizing gains along the way is overwhelmingly temperamental.
We can be incredibly successfully by picking investments that will grow with us into the future and, provided you have a properly constructed portfolio, by staying fully invested during temporary market declines.
It is the only sure way to continuously capture the entirety of the market’s unabating advance toward a higher future.
Looking at history
The proof is in the pudding. UBS looked at monthly S&P 500 total return data since 1945, specifically on 1/3 of that time when the market was trading at an all-time high.
They asked: from any entry point at an all-time high, what were the investor’s odds of a positive outcome?
Their findings: investments in markets making new highs did better than purely using entry points.
- In 34% of the cases after buying at an all-time high, an investor would at no future point have seen the investment trade in the red.
- In 59% of the cases, the investor would at no point have suffered a greater than 5% drawdown.
- In just 15% of instances would an investor have suffered a “bear market” of more than a 20% decline in their initial investment value.
“This sounds counterintuitive,” the firm rightly observed. “…we often overestimate the risk of buying right at the peak, and our fear of losses can lead us to the costly decision of holding excess cash with the hope of a better buying opportunity.”
Applying it personally
Make no mistake: this does not mean you should just use the “set it and forget it” method in your portfolio. Of course, not. Markets, and your lives, are cyclical in nature.
This letter is not meant to dissuade you from strategically selecting investments. It’s meant to passionately redirect you from trying to think you know more about the short-term timing implications of the stock market than everyone else.
But how can you resist the urge to make changes in your portfolio when things get rough? Wouldn’t it be nice to have gathered enough information in advanced so that you know what impact this down market will have on you, and what your next move should be? That’s having a contingency plan.
The result of planning is not about the binder you receive with pictures, pie charts, and projections – it’s about decreasing your burden of uncertainty.
It’s about identifying your current and future actions required to achieve a desired outcome, even when the markets appear to be failing you.
A well-built portfolio requires diligent research and thought. My team of certified financial planners do this daily for our clients, and they’ll tell you that it requires aligning your wealth with your goals and timelines, and with your attitude and aptitude towards taking risk.
It is rare that two of our family’s portfolios would ever look the same. You should select the correct investments to turn your wealth of resources into a blueprint that represents the life you want to live.
If you have the time and wherewithal for the research, and the emotional fortitude to consistently realign your philosophy to that of the successful investor, then keep up the good fight.
Just remember, other members in your family may not. Your family’s financial dignity and independence is a critical responsibility, so take heed of the philosophy that just may save your family’s wealth. After all, it’s not just your money, it’s your future.