Warren Buffett says “Investing is simple, but not easy.” What’s simple is that staying the course and continuing to invest into market downturns, which has generated superior returns.
What is very hard to do is for investors to keep fear and emotion in check, to not let bear markets destroy your game plan and transfer your potential winnings to another investor who stays the course.
Every client of our firm has an investment policy statement, derived from quantitative analysis of their risk profile, and set to help them financially achieve goals and objectives with a better mix of risk and reward that is unique to all of them.
It’s key to not have more risk than you can handle or need to take, but to take enough risk that your plan is going to have the higher chance to be successful for you if you stick to it. When we speak of diversification to help smooth out returns and protect us against unnecessary risks to one or a few assets losing value, by being diversified, we improve our chances of owning more winners.
If we look at the global stock market, in twenty years, from 1994-2014, by owning the market we earned 7.5% a year. If we excluded just the top 10% of performers each year in the market, returns drop 4.5% annually to 3.2%, and if we miss the top 25% of stocks each year we lose 6% each year. Owning more stocks improves our probability of owning winning stocks. It also smooths out returns and takes much of the guesswork out of the markets and stock selection.