Investing Truths and How to Avoid the Noise

April 5, 2013

Downturns over the last 5 years have provided an incredible opportunity to learn core principles about investing.  During crisis times, there is a lot of rich material about learning to become a good investor.  2008 was a monumentally historic year for the stock market, but not in a good way.  If we could bottle up the feeling we had during the crisis, it would be truly priceless.

Some recent statements we have heard over the past few seasons are:

“All time high…should we be pulling back on the stock market?”

“This bond market is a bubble.  Should we avoid buying all bonds?”

“All I do is put money in and lose it over time”

“If so and so is elected, the country is lost and the economy is not going to make it”

The Money-Guy thoughts on investing –

  • Investing is a great way to earn and make money and build financial independence over time, but it is slow and takes a long term commitment.  Some key concepts are deferred gratification, compounding interest, and dollar cost averaging.
  • Volatility kills alpha.  Always think in terms of risk and reward.  Long term investments will be rewarded, but you need to commit for at least 5-7 years.
  • To minimize volatility, diversify.  Think about your investments like a marathon, not a sprint.  Diversification helps you make it through the full marathon.
  • Avoid chasing the latest trend.  There will always be something that seems to be the “hot” thing to invest in right now.

In a column featured on “The Motley Fool “, we found an interesting article called,  “The most inevitable headline of all time.”   This article essentially notes that those who stuck it out in the market were rewarded.

History is very clear that if you hold stocks for a long time, your odds of making money are very high.  Since 1871, there have only been four periods where an investor purchasing stocks didn’t make money in real inflation adjusted terms.  If you purchased stocks once a month (dollar cost averaging) since 1871 – 87.8% of your purchases would be profitable 10 years out.  Those four brief periods that left you in the red were usually followed by above average returns.

One of our favorite quotes from investor Jeff Gundlach is “You make 80% of your money, 20% of the time.”   If you want to consistently enjoy the markets biggest gains, you must put up with its declines from time to time.  Your investing time horizon should depend on your age and your situation, not on the market.

The market today is at the same high as in October 2007, but companies are more profitable, have higher  earnings,  are paying larger dividends, and the alternatives to investing in the stock  market are scary with the T-bonds yielding 1.89%.  This is not to say get out of bonds or jump into stocks, but diversification is the answer.

Even very educated professionals can make bad calls when it comes to the stock market.  We share an article in the show that details a number of investing gurus who have been made to look foolish by the unpredictability of the market.

Our recommendation for you is to design an asset allocation that matches your goals, your age, your risk tolerance. Simply put: get the risk right, and the return will follow.

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