Investing Lessons of (This) CenturySubmitted by S. F. Ehrlich Associates, Inc. on June 30th, 2017
June 30, 2017
We continually try to share information so our clients understand why we do what we do. Why we build diversified portfolios, or why we sell some equities when the stock market is going up and everyone feels euphoric, and buy them when the market drops and everyone is cowering in fear. Why we encourage those in the marketplace to work a little longer and why we encourage those who are retired to spend just a little less.
Allan Roth, who writes for such magazines as The Wall Street Journal, AARP the Magazine, and Financial Planning, points out a few investing lessons to be learned in an article he contributed to Financial Planning Magazine title: Investing Lessons of the Century. They include:
- Stocks are really risky: Markets have lost 50% or more two times over the past 17 years. Unless you’re a 25-year old with decades to work, a 50% drop can wreak havoc with a financial plan.
- US stocks are not the stock market universe: If you want true diversity, you have to own the world. Even though many US companies have significant sales overseas, emerging and developed markets don’t always perform in tandem with the S&P 500.
- The long run is really, well, long: While none of us know how long we’re going to live, improvements in medicine, lifestyle, etc. are contributing to longer and longer lifespans. Play it too safe in your investing strategy, and the ending may not be as happy as you envision. (Also see note above about stocks being really risky. Yes, there’s a happy medium for everyone, though it can sometimes be hard to find and agree upon.)
- Break the prediction addiction: One can always find a so-called ‘expert’ to support their opinion. Donald Trump won, so the markets have to go down. Or up. The markets have gone up so they have to go down. Now. Soon. Place bets on how you think the market will behave, and there’s a high probability you could bet wrong.
- Don’t bail on bonds: Barron’s reports that “Since 1928, the S&P 500 has generated annualized total returns of 9.3%...but a less aggressive portfolio that captures only 63% of the upside in rallies can still outperform the index, chiefly by limiting downside exposure…” That’s what bonds can do for a portfolio.
- Investing based on the recent past is a mistake: Roth notes how many people he meets who have a high risk tolerance when markets are rising, but believe that cash is king when they’re falling. None of us have a time machine; riding the wrong wave can be very costly.
1 Roth, Allan S. “Investing Lessons of the Century.” Financial Planning, May 2017.
2 Levisohn, Ben. “What Bad News? Markets Surge Despite It All.” Barron's, 27 May 2017.