What Works Isn’t Going to Grab Headlines and Requires Unemotional Investing

January 20, 2016

 

The right investment strategy is the one that doesn’t bet on predicting the future, but rather is much less exciting, even boring, and requires far more discipline, and is much harder to do as we humans are not wired to do it.  

 

These early days of 2016 are testing investors like many have never been tested.   Larry Swedroe a market researcher and author we respect calls what many investors are doing now to be “catastrophizing”.   It means to focus on the negative, missing out on positive employment gains, low inflation and gas prices, which can force that investor to only see doom and gloom and be indecisive, or what we see often, is to panic sell.  

 

Another investor we all should respect and learn from, Warren Buffett, provides some additional useful quotes and wisdom that Larry Swedroe recently included in his blog post “Keep Calm and Step Forward.” Here is some of Buffett’s wisdom to consider:

 

“Inactivity strikes us as intelligent behavior.”

 

“The only value of stock forecasters is to make fortune-tellers look good.”

 

“We continue to make more money when snoring than when active.”

 

“Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.”

 

“Try to be fearful when others are greedy and greedy only when others are fearful.”

 

Unfortunately, Buffett learned, and research backs it up that Swedroe discusses in his blog, that while we’d all like to believe we can predict market downturns, there isn’t data to support anyone can do that well over time, and in fact, we find that market-timing is an indicator for doing poorly in investing.   Missing just a few days in the market dramatically lowers investment returns. Dimensional data tells us that over a 45-year period (1970-2015), if we missed the best day in the market due to timing, we reduce our annual returns from 10.27% to 10.01%.   Miss 5 of the best days in that period, and annual returns fall from 10.27% to 9.24%.  Miss 25 of the best market days and returns fall to 6.87% annually.    

 

Overall performance plummets by missing just a few days.  It gets worse the more days we miss. Markets reward discipline and punish impatience.

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