A month ago, a friend and I met at a coffee shop to catch-up. Our schedules make these opportunities infrequent. Each of us need a few times per year to discuss sports, politics, and family life. After covering the bases, our conversation transitioned to personal finance. He knows my interest in it and wanted an unbiased opinion. Ashamed by a prior decision, he detailed his market exit prior to the 2016 presidential election. “I think I made a huge mistake and now our money is on the sidelines without a plan.”
My friends strategy is common. In fact, many investors made the same decision! In this post, I will identify two behaviors for successful investing. The intent is to prevent investors from making the same choice. After all, the best investment plan is one for the long-term without market timing.
Rule 1: Tune Out The Noise
Personal finance websites are littered with opinion. In fact, the financial industry is accepting of opinion rather than fact. Try for yourself; look for article titles with the words may, might, could, should, and if. Authors want to stir emotions and do so with misleading page titles and opinions. For example, the following article Air pollution now leading cause of lung cancer. Within the article, Dr. Julie Sharp, head of health information at Cancer Research UK makes the following statement, “Although air pollution increases the risk of developing lung cancer by a small amount, other things have a much bigger effect on our risk, particularly smoking.” I will let you draw your own conclusion about the title and content of the article aligning with accepted science.
There are numerous publications attempting to stir the same emotions as the air pollution and cancer article. In fact, “fake media” has become a popular catch phrase lately. As a consumer of media, it is important to discern fact from fiction. Take the article $25 oil is coming, and a new world order with it, think tank says. Of course $25 oil could be coming but it could also be $125! Making the prediction is not difficult but providing a time frame is near impossible! Another way of saying it, predicting what will happen is easy but when it will happen is tough.
Two events that stirred emotion in the international and domestic markets were Brexit and election of Donald Trump in the United States. CNN Money predicted a Trump win would sink stocks! Brexit’s ripple down effect has been non-existent. In fact, London’s exchange (FTSE) is up 22% in the last year.
Business Insider and douche-o-potamus Jim Rogers published The worst crash in our lifetime is coming in June 2017. Absent in the piece are the numerous past predictions of Rogers which never came to fruition.
Presidential Election Returns Since 1984
There have been nine presidential elections in my lifetime. Election year(s) include: 1984, 1988, 1992, 1996, 2000, 2004, 2008, 2012, and 2016. The S&P 500 return* for each of the aforementioned elections (January 1st-December 31st): 8%, 18%, 8%, 27%, -5%, 6%, -36%, 16%, and 21%. The average return of the nine election years is a respectable +7%.
Rule 2: Determine Risk Tolerance
Risk is defined as the exposure to danger, harm, or loss. The historical return of the S&P 500* is 9%. In 1954 it was up 45% and in 2008 it was down 28%. Since 1971 the average monthly return is .7%. The S&P 500 delivered its’ worst five-year return of -6.6% over the five year period ending February 2009. Although past performance does not indicate future results it provides context to an investor. That is, the ride is prone to turbulence.
If performed correctly the following exercise can save an investor from anxiety and fear. More important, it provides a foundation to stick to the plan through thick and thin. Open the questionnaire, depart to a quiet place, and complete each question. Let each question sink in and use bigger numbers if that is applicable to your portfolio. If you have $250,000 in investments think long and hard about life after a 31% decline. The purpose is to determine an asset allocation. Simply put, to determine your stock to bond ratio.
Tuning out “fake news” and determining risk tolerance are mandatory for successful investing. The media needs ratings and to get them frequently bends the rules. If a financial advisor, friend, or spouse does not let the noise dictate their strategy it does not make them indifferent. In fact, it means they have confidence and understand short-term fluctuations will not deprive a fulfilled retirement.
*Annual return plus reinvested dividends
These books are wonderful resources. If this post has you thinking about next steps then I encourage you to read these books which is exactly what I did seven years ago when I started to question my long-term strategy.