Like life, investing is a journey. Periodic reflection can be nostalgic as well as offer learning opportunities. Below are some food-for-thought lessons learned over the recent past.
- There is no opportunity for return without some risk.
Fundamental investment theory suggests risk and return are tied together. If there were no risks, there would be no returns. Investment return is the reward one receives for taking risk. Higher risk means high potential return. There are no promised futures, and hence no promised returns.
- Portfolio diversification can mitigate risk but can’t eliminate it.
Diversification is the art and science of not putting all your eggs in one basket. Diversification should resemble exposure to various sectors, asset types, asset classes and investment styles.
- Most dollars flow into high performing investments AFTER the performance has occurred.
The most famous of the behavioral finance studies is Dalbar’s Quantitative Analysis of Investor Behavior (QAIB)1, revisited bi-annually with the similar results. Average investors trail the market due to emotional decisions. As Star Wars’ Obi-Wan Kenobi said, “be mindful of your thoughts, they betray you.”
- There is no such thing as “short-term investing.”
Investing is a long-term commitment of your capital to pursue greater goals, such as retirement, education, financial independence, or income. A short-term focus is not investing… it’s speculation.
- Markets go through cycles.
Human psychology is wired for shorter cycles than investing requires, which often makes investors uncomfortable. Persevere with patience, keeping perspective, and don’t try to time the market. Don’t forget, volatility tends to be clustered, meaning big declines tend to accompany big upswings.
- Market indices can tell a very distorted story.
Market indices are not evenly weighted among sectors or stocks. Some stocks or sectors have more influence. For example, technology tends to be highly weighted, so high technology returns have a disproportionate effect on the overall index.
- One bad year can reverse many good years.
There is no better reminder than the 2022 investment experience. Bond markets and equity markets alike saw double digit negative returns after a number of positive return years. It is most important to maintain perspective and not let your emotions get the better of you during these times. Warren Buffett said it best, “The stock market is a device for transferring money from the impatient to the patient.”
- Knowledge does not make you wiser.
Today’s instantaneous smart phone fact checking can be mistaken for wisdom. True wisdom requires knowledge accompanied by experience and good judgement. Investing is akin to wisdom, not knowledge.
We recognize that investing is not an easy endeavor. More often than not, it’s our human tendencies that cause angst. Thank you for the trust you’ve placed in us as we continue on this journey.
1 https://www.dalbar.com/ProductsAndServices/QAIB
CRN-5751447-061423
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