“The individual investor should act consistently as an investor and not as a speculator.”
Those are the words of Benjamin Graham, considered by many as one of the founding fathers of investing and someone who has inspired generations not just to invest, but to invest prudently, and to invest for the long term. So what exactly did Graham mean when he said this? And what does it mean to “act consistently as an investor” as opposed to a speculator? Simply put, a speculator is one who tries to “get rich quick” through methods such as market timing or taking big bets on high-risk investments. Although the idea of making money quickly can seem enticing to many, (I mean who doesn’t want to get rich overnight?) if it was so easy, then everyone would have already done it instead of staying invested.
As we know, the stock market is constantly changing and going through bull markets (periods of positive returns) and bear markets (periods of negative returns). Unfortunately, it’s impossible to know when precisely the market will go up or down. Yes, I said it; even us investment professionals can’t predict whether the stock market will move up or down on any given day. However, don’t lose hope. Just because none of us have a crystal ball doesn’t mean that we should throw our hands up in the air and avoid the markets. In fact, it means the opposite. We should act consistently with our long term goals as an investor and staying invested. In other words, do not let emotions rule financial decisions. This means staying the course, even in volatile or uncertain times.
However, you don’t have to take my word for it, or even Ben Graham’s. Take a look for yourself.
The graph above shows how a moderately allocated portfolio of 60 percent stocks and 40 percent bonds fared over time following significant national and global crises. You can see that if you exited the market in the midst of these market crises, you could have missed the upward movement that followed.
2020 is another classic example of this. As the markets began falling due to the virus pandemic, many investors panicked and sold out of their equity holdings. As a result, they missed out on the subsequent upward move. If you would have exited the market on March 13 of 2020, the day President Trump declared COVID-19 a national emergency, you would have locked in negative returns of -15.7 percent for 2020, based on the S&P 500 Index. However, an investor who remained fully invested throughout 2020 would have realized returns of more than +2.4 percent year-to-date through October 30, based on the same index. That’s a pretty big difference. If someone gave me the choice of making 2 percent by staying invested or losing 16 percent, I know which I would choose.
When you exit the market during times of stress, you must be right twice. Not only do you have to exit the market at the right time, but you also have to reenter the market at the right time. If you get one of these wrong, you could not only lose money on the way down, but also give up return as the market recovers. Investors that have prudent long-term goals cannot afford to take on this added risk.
In addition to decreasing your chances of generating stable returns over time, market timing also makes it tougher on you, the investor. Trying to time the market can take a big toll physically, mentally, and emotionally. And that makes sense. We’ve worked years and years to earn and save that precious nest egg. Why shouldn’t we pay attention to our years of hard work each and every day? Well, we should…but we shouldn’t worry and stress about it constantly and we shouldn’t take bets that we aren’t comfortable with. Investing should not control your life nor affect your decision making in the short term. I can speak from personal experience that I have undergone many sleepless nights thinking about and stressing over investment decisions that were probably above my risk tolerance. I now sleep a lot better knowing full well that over long periods of time, sticking to a plan works. Trying to “get rich quick” and time the market perfectly is not worth it. History shows that compounding works, and consistently contributing to your 401(k), IRA, or other investment account is truly the best way to navigate the investment world and achieve your financial goals.
If you do find yourself worrying and stressing too much about what the markets or your portfolio did today, then maybe it’s time to sit down with a financial advisor and reevaluate your risk tolerance and comfort level. If you or anyone you know would like to have a conversation to see how you can better your financial management, connect with us anytime at 855-855-5455 or firstname.lastname@example.org.
Graph Source: Morningstar
Data Source: Bloomberg
Year-to-date return through March 13, 2020 represents total return of the S&P 500 Index per Bloomberg for dates 12/31/2019 through 3/13/2020.
Year-to-date return through October 30, 2020 represents total return of the S&P 500 Index per Bloomberg for dates 12/31/2019 through 10/30/2020.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Domani. A copy of Domani’s current written disclosure brochure discussing our advisory services and fees continues to remain available upon request.