By Roger Nusbaum, AdvisorShares ETF Strategist
Tadas Viskanta from Abnormal Returns runs a blogger wisdom series when he goes on vacation and he asked me to participate this year. He asked several questions for everyone to weigh in on and I took a stab at the following four.
What do you know with a high degree of confidence about investing that does not require any statistical support?
The stock market goes up most of the time and every so often it goes down a lot and scares the hell out of a lot of people because it is somehow “different” than other past declines. The circumstances for the declines are different but not the market process for handling declines. It goes down a lot, people panic then it stops going down, often for no apparent reason and then it starts to go back up to a new high. The only variable is how long it will take to make that new high. An advisor or investor may or may not be able to add alpha along the way but the simple act of remembering there is nothing new about the market going down a lot along with maintaining a suitable asset allocation and adequate savings rate should be sufficient provided that panic is not succumbed to.
Ten years hence, what we will be embarrassed by that we were excited about in 2017?
We will likely be embarrassed by whatever it is we fear the most today. For some, that might be something political, for others it might be fear of one of the many bubbles that we read about that probably aren’t real. In the summer of 2002 there was a tremendous fear whipped up because CEOs were going to be required to sign off on reported earnings. This was a follow on from some of the big corporate frauds that emerged coincidently to the tech wreck. I promise you the fear of this was very real but it coincided with one of two important market bottoms. Most people that I talk to now have no recollection of this threat
If you could (magically) impart one piece of wisdom to all investors what would it be?
The ups and downs of the market are beyond your control. Things like savings rates, maintaining proper asset allocation and reigning in your emotions are far more likely to be within your control. Focus on what you can control.
What’s the one thing investors should do to simplify their lives?
Remember your time horizon and why you’re investing and never lose sight of that priority. In the last 25 years, the S&P 500 is up 488% (per Google Finance). Someone who was 40 in 1992 might have had a little bit accumulated for their retirement and so has had the opportunity for plenty of growth, all the more so if they continued to put more into their accounts. Obviously the last 25 years includes two instances where the market cut in half but the now 65 year old who kept their head in the face of crises has benefitted from huge gains.
Someone who is 40 years old today will like have to deal with a crisis or two over the next 25 years and while returns may not be as great as the previous 25 years, avoiding panic and maintaining a proper asset allocation will give the best chance for getting the most out of the next 25 years.