Who Are You?
If you want to do well in the investing game, you have to know yourself. What am I talking about? Know how you think, your behaviour patterns, and your emotional makeup. I’m not saying it’s easy, reflecting on yourself, questioning whether you’re as smart and beautiful as you think you are (okay, listen, you are smart and beautiful but that doesn’t mean you should stop asking the hard questions; I mean, think how much smarter you will be once the answers start flowing, and how much better you will be as an investor which, naturally, will make you that much more beautiful!).
Why should we take the time to understand our self? Because knowing what drives us in certain directions facilitates better decisions for ourselves, for our loved ones, and paves the way for a more peaceful journey, whether in the wide world of investing or in other worlds.
The Investor, The Bull and The Bear
During the so-called Great Recession of 2008-2009, with doomsday soothsayers operating in overdrive, how did you respond? And was your response any different during the rapid fire, insane, this is the big one, run for the hills, market collapse that we had in January/Feburary 2016? Was the end of capitalism nigh? Did you run to your investment advisor demanding that he/she sell everything? Did you bury your head and refuse to look at your monthly statements for fear of reading smaller and smaller numbers on the bottom line? Resign yourself to everlasting poverty? Dump your securities portfolio, buy gold, build a bunker, load up on hardware, ammo, spam and water?
Or, rather than allowing fear and panic to rule, did you tap into your inner Buddha who calmly reminded you that Bear markets last an average of 18 months and lose an average of 40%. And after the Bear retreats? The Bulls charge the stage for an average of 97 months. And in that time, the 40% and a whole lot more is recouped. The moral of the story of the Investor, the Bull and the Bear? When the Bear growls, it’s generally best to just sit there, and do nothing.
Chewy Bit. One of the more enjoyable authors in the Buddhism realm is Sylvia Boorstein who wrote a book playfully titled, Don’t Just Do Something, Sit There – http://www.amazon.com/Dont-Just-Something-Sit-There/dp/0060612525]
These numbers I’m throwing at you are all fine and dandy and true. But do they matter to you when, for the most part, you lead life with your heart? And if your heart is aching and telling you one thing, it sure is tricky to let that feeling go and allow your head to make the call.
So if fear or greed or anxiety or exuberance or any other heartfelt emotion are stressing you too much, recognize this about your self. Own it. And then follow your heart. Know how YOU respond to winning and losing investments, market run ups and market meltdowns. In short, what is your investment comfort level? Keeping in mind there is no right or wrong. This is about YOU and what works best for YOU.
If you know that you get all jittery when numbers start falling, then it’s best that you build a portfolio that will help smooth the ride, i.e., larger cash and fixed income component, less exposure to individual stocks (maybe adding Mutual Funds and/or Exchange Traded Funds for equity exposure instead of individual stocks). And if your temperature rises too fast when your portfolio is heating up, and you’re prone to convincing yourself that all of your holdings have a one-way ticket to the moon, then know that about yourself too, and stick to a plan that says you will sell a certain percentage of your holdings at certain price points. Because for the most part, moonshots return to Earth with a thud.
To give a hand up to your self-knowledge, take a look at the line graph below, setting out the typical emotional rollercoaster experienced by the vast majority of investors:
Better yet, download this graph, stick it on your fridge and learn from it the next time (and there will be a next time) your emotions get out of hand.
Active Investors buy and sell securities with a view to achieving a better return than market indexes (i.e., NASDAQ, S&P 500). This can be done. But keep this in mind: investment management firms and advisors don’t tell you that it’s not often achieved on a consistent, year-over-year basis. In fact, close to 80% of active fund managers perform worse than a range of Indexes over extended time periods, i.e., 2, 5, and 10 years. 80%! That’s a big ole’ whopping number that deserves your attention.
Passive Investors typically buy and hold Index funds. The advantage is you pretty much earn a return equal to the return of the particular Index. The disadvantage is that you will not do better than the Index. But for those who aren’t interested in excessive risk, and understand that less than 20% of Fund managers beat Indexes, the safer, less risk, less volatile, preserve the nest egg approach to investing suggests that Index funds are well worth considering for your portfolio.
Index Funds represent a simple approach, nothing fancy, hip, cool, trendy, or anything to brag about. It’s the turtle approach to investing; slow, steady, and possibly downright boring. And that’s exactly what most investors should seek: a boring, completely not sexy, portfolio that makes you money. And when the next chicken little is madly squawking about the sky falling, you can simply turn out the night light and pay no heed.
Chewy Bit. A stock market Index measures the value of a segment of the stock market. For example, if an Exchange Traded Fund tracks all US technology stocks, then that Fund’s return will be in line with the performance of all US technology stocks.