Warren Buffett said, “Investing is simple, but not easy.” You would think that if something were simple that it would also be easy. Not so.
Take losing weight. Burn more calories than you take in. The surefire way to invest is to buy low and sell high. Both are very simple, but extremely difficult.
The reason these are so difficult is because our goals tend to be realized over a long period of time, while we are tempted to pursue pleasure and comfort today.
A slice of chocolate cake now sounds a lot better than forgoing that pleasure for losing a few pounds in several months. Appeasing our emotions today by “adjusting” our portfolio gives us a sense of control and instant emotional relief, but often results in a long-term cost.
Watching the markets and/or frequent evaluation of portfolio performance are some of the worst activities investors perform. This is because, in the short term, security returns fluctuate wildly…even though the value of the underlying companies seldom change. Think Dec 2018 and Jan 2019.
Be Prepared for Fluctuations
Fluctuation is a normal part of the market and should be expected, in both bull and bear markets.
Over the past 38 years, the S&P 500 has experienced intra-year losses of greater than 10% more than half the time. But don’t fret. Even in those volatile years, the S&P 500 still generated positive annual returns 68% of the time.1 If we trade based on fluctuations, we may be leaving a lot of future return on the table.
If we had hibernated this last fall and just woke up, we would see little change in the markets and think nothing happened. We would have missed the panic in December and subsequent rally. We would have witnessed very little fluctuation.
This teaches us an important lesson. If we aren’t comfortable with the amount of fluctuation in our investments, the best thing we can do is stop looking. We may not be able to control the amount of volatility in the markets, but we can control how much we experience. It is simply a function of how often we look.
- JP Morgan, Guide to Retirement. Dec 31, 2018
c) 2019 The Behavioral Finance Network. Used with permission
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Indices are unmanaged and cannot be invested into directly. Past performance is not indicative of future results.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.