By Ryan O’Donnell, CFP® and Mike O’Donnell, CFP®
Key Takeaways
Your portfolio is like a bar of soap -- the more you touch it the less you have.
Emotion and intuition were valuable survival skills for our ancestors, but they make us bad long-term investors.
Meeting with your advisor is not just about the numbers.
Our firm’s philosophy has always been geared toward long term consistent returns. But, it’s hard not to get lured into something shiny and new.
Yes, it's frustrating right now when just about every asset class is going down from stocks and bonds, to real estate, gold, even crypto. But while many people want you to believe “it's different this time,” it rarely is different. The same principles that have delivered exceptional results over the last 100 years still hold true today.
If only we had 20/20 hindsight
Sure, if all of your money was invested in the energy sector at the start of this year, you would be among the few who made money this year. Or if you had pushed all of your chips into tech from 1997 until late 1999 you would have been sitting pretty – provided you knew exactly when to get out before the dot-com crash of 2000. Financial stocks would have been a great choice from 2004-2007, but would you have been able to get out of your position before the global financial crisis of 2008-09?
The trouble is that timing markets (and picking the right sectors) is really hard to do. It’s even harder than beating the casino night after night. Countless independent studies have proven that. The problem with timing is that you have to be right about when it’s time to get out, and even harder – you have to be right about when it’s time to get back in. That’s why it’s so important to have a globally diversified portfolio and a long-term view.
Remember back in 2010, a 30-year U.S. Treasury bond was yielding 4%. Sounds pretty good, right? Well, all the experts were telling us to stay out of Treasury bonds back in 2010 because they were sure rates would be rising for the next several years. Turns out the 30-year government bond rate dropped to as low as 1.27% over the next 10 years. And most investors had to endure years of meager returns on the “safe” part of their portfolios.
Experts are smart, but they’re not always right. As the old saying goes, “economists have predicted 21 of the last 3 recessions.” What seems so obvious turns out to be wrong. As legendary baseball manager Casey Stengel liked to say: “Never make predictions, especially about the future.”
Why is this? The markets do a good job of pricing in expectations. So, when something is obviously going to happen – say the Fed preparing to raise interest rates – that information is accounted for in prices and rarely causes price disruption. The things that cause markets to move erratically are the unexpected events and how people react to them – usually not calmly.
The reality is that your portfolio is like a bar of soap -- the more you touch it the less you have. Over the last 30 years, if you just held your portfolio without making any changes to it your equity portion would have returned on average 10.7% per year. Not bad.
The problem is we’re human. We have emotion. We think we have intuition. It’s not in our nature to leave things alone. Emotion and intuition were valuable survival skills for our ancestors, but those triggers make us bad long-term investors. That’s where a professional, objective advisor can be extremely helpful. Talking to him or her regularly will reassure you that you’re doing the right thing.
When there’s lots of volatility in the market and things are uncertain, it’s natural to want to change things up. But an advisor can help you re-focus on what's important in your life, not just the finances. To us, the most important meeting with your advisor doesn't involve a performance report or any specific agenda. It's about connecting on a personal level.
Are there any important changes in your life? Who are the people and causes you care about most? How do you want to be spending your time when you’re no longer working? Your financial plan is not a scorecard; it’s a blueprint for getting you from where you are now to where you want to be.
There’s a great chart in our e-book “Avoid the Noise” called the Emotional Curve of Investing.
Let’s say you get a hot stock tip. Like most people, you don’t buy it right away. You track it for a while to see how it does. As expected, it starts trending up (you feel confident). And let’s say it continues its upward trend. Now you’re feeling arrogant or greedy, so you buy it. Of course, soon after you buy it, the stock starts dropping. Now you feel fear and regret, possible shame. You promise yourself that if the stock just goes back up to where you bought it (Fallacy of Breakeven), you will never do it again. You don’t tell your spouse or partner about your investment.
Now let’s say the stock continues to go down (Panic). You don’t care about making profit anymore; you just want to get out with a respectable loss. So, you sell on the day it recovers a little. And what happens next? New information comes out and the stock races to an all-time high (Regret and Anger).
As humans, we have emotions, which makes us poorly wired for investing. Emotions are powerful forces that cause you to do exactly the opposite of what you should do. And that’s where your advisor can be especially helpful – preventing you from being on an emotional rollercoaster even though it seems the rest of the world is on one.
You can’t put a price tag on being able to sleep well at night.
Repeating our favorite quote from Warren Buffet: “Be fearful when people are greedy and be greedy when people are fearful.” We are happy to discuss any questions you may have about your portfolio or retirement plan. Please don’t hesitate to reach out.
