Welcome to 2022, one of the most volatile starts to a calendar year in recent memory. As I sit down to write this commentary, the equity markets have been taking it on the chin. The S&P 500 is down 12.9%, while the NASDAQ 100 is down a shade over 21% (-21.06% to be more specific). You simply can’t sugarcoat it; the beginning of the year has sucked for the patient long-term investor.
So, what’s a former speculator, turned patient, long-term investor to do?
Well, all I can do is to do what I do - so what is it that I do? Well, it’s simple: The mainstream media’s job is to present you with narrative, it’s my job to provide you with hard data which will ultimately get you and keep you focused on achieving your long-term financial goals.
There are a few simple rules that regardless of the underlying fundamentals of the economy or the markets, will help the long-term investor muddle through:
- Diversification! Diversification! Diversification! We’ve all heard it, but how many of us have actually listened to it? - You don’t put all of your eggs in one basket. While all your baskets may leak water from time to time (like this year for example, which has seen both stocks and bonds have a negative start to the year). However, in order to help mitigate total and permanent capital loss, diversification is STILL your best tool! Spreading your capital among many of the great companies of America works to shield your portfolio from permanent loss.
3. Don’t be you own worst enemy! Your behavior should be the bedrock of your investment policy; it matters WAY MORE than your investment knowledge. Want proof? I present you with exhibit A:
If behavior doesn’t matter, then how do you explain this chart? Why does the average investor perform so poorly against the backdrop of index returns?
Yup, you guessed it: Investor Behavior. It's hard to get the superior rates of return that are absolutely critical to your goals, when you're sitting on the sidelines. Yet this study clearly shows that sitting on the sidelines is something that investors have gotten comfortable doing, especially when the seas of volatility are raging.
3. Timing the market, just doesn’t work – PERIOD! I know its axiomatic, but the evidence for this rule is simply too great to ignore. Have a look see for yourself -
Once again, that pesky thing called “FACTS” gets in the way here. Because it sure looks like if I’m an investor and I’m not fully invested, I potentially wipe out nearly ALL hope of ever achieving my financial goals. Why does every financial talking head on television play to investor emotions by trying to talk you out of your investment allocation when corrections or bear markets happen? Because it works! It sells and it’s sexy. When you’re smarter than everyone else by “avoiding” the corrections and bear markets, you feel empowered – the problem is, you risk doing irreparable damage to your future financial goals when you’re wrong. Quick hint: Those talking heads are wrong more often than they’re right!
4. There’s always a reason to be scared! It’s inevitable – these sometimes scary, but normal ups and downs are going to make you question your financial plan. Throughout it all, there is ALWAYS a reason to sell out of your investments, just take a look at all the reasons you shouldn’t have been invested just since the beginning of this century –
So, had you listened to all the voices of the knuckleheaded, so called “experts” on the television who told us that now is “NOT a good time to investbecause of . . . ” where would you be? You guessed it – further from where you want to be.
Understand, that I am in no way meaning to dismiss your feelings of anxiety and nervousness when it comes to corrections and bear markets, I simply want YOU to understand your feelings, and not let them overcome you, causing you to make decisions that are not in the best interest of achieving your financial goals.
Remembering these lessons in times like these, just may help you get through, and if it does, then every single word that I’ve written will have been well worth it.
Thanks for reading!