Saturday, January 09, 2016

On Investing

Various stock market has been choppy of late, which is usually when Animation Guild artists and others commence getting nervous. (Oh Gawd! I gotta put everything in the stable value fund! Quick!)

But people who feel they need to do that, should pause, reflect and perhaps rethink their position ...

A few truths about bear markets in stocks:

1. They happen. Sometimes stocks go down. That’s why they’re called risk assets. Half of all years since 1950 have seen a double-digit correction in stocks. Get used to it.

2. They’re a natural outcome of a complex system run by emotions and divergent opinions. Humans tend to take things too far, so losses are inevitable.

3. Everyone says they’re healthy until they actually happen. Then they’re scary and investors who were looking for a better entry point begin to panic.

4. The majority of the people who have been scaring investors by predicting a bear market every single month for the past seven years will be the last ones to put their money to work when one actually hits.

5. It’s an arbitrary number. I have no idea why everyone decided that a 20% loss constitutes a bear market. The media will pay a lot of attention to this definition while it doesn’t matter at all to investors. The 1990s saw zero 20% corrections but two 19% drawdowns. Stocks also lost 19% in 2011. Does that extra 1% really matter?

6. Buy and hold feels great during a long bull market. It only works as a strategy if you continue to buy and hold when stocks fall. Both are much easier to do when stocks rise.

7. Your favorite pundit isn’t going to be able to help you make it through the next one. Perspective and context can help, but there’s nothing that can prepare an investor for the gut-punch you feel when seeing a chunk of your portfolio fall in value.

8. History is a broad outline of what can happen in the markets, not what will happen. Every cycle is different.

9. They’re very difficult to predict. All of the valuations, fundamentals, technicals and sentiment data in the world won’t help you predict when or why investors decide it’s time to panic.

10. These are the times that successful investors separate themselves from the pack. ...

I've made lots of mistakes while saving for my oncoming years of geezerhood.

I've bought at the top. I've sold at the bottom. I've panicked when I should have been steady and arrogant when I should have been scared spitless.

What I've learned from all my boneheaded mistakes is that the best strategy is to set up a stock and bond allocation you can live with (and that suits your age), and then pretend it isn't there.

Because if you fixate on every downdraft in the markets, on every wiggle and gyration of stocks, you'll nurture high anxiety deep in your brain. And end up doing exactly the wrong thing at the wrong time.


Celshader said...

When I first started learning about investing back in 2007, I was intrigued by "slicing-and-dicing." However, fund minimums prevented me from doing much more than holding a simple three-fund portfolio.

Today, I'm a believer in low-cost "all-in-one funds." Most of my holdings are now in Vanguard LifeStrategy funds. It's similar to the three-fund portfolio I had before, but it can rebalance itself while I ignore it.

Steve Hulett said...

This is an excellent option for almost anybody. And it's super simple to implement and maintain.

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