Perennial Advice from 3 Sages of Investing

Advice, whether precedented or not, every age has its worries. If you’ve been around for the past two years, you’ve dealt with COVID, supply-chain shortages, interest rates going up, inflation skyrocketing, and geopolitical instability in Eastern Europe — all things that keep investors at every stage up at night worrying. Whatever the current crises are, we can be sure that they’re going to affect the market, at least temporarily. The economy, after all, comprises countless variables, the least predictable of which is, well, us. As scary as uncertainty can be, wisdom is the balm that soothes the fretful mind. Especially if, unlike the market, its value is constant.In that spirit, here are words of advice from three great minds in investing. Wisdom that, regardless of when you read it, is sure to help you stay smart, even when the world of investing isn’t. 

Market crises come and go

“History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” Thus, said legendary mutual fund manager Shelby M.C. Davis.If history repeats itself, it’s not surprising that markets go through the same patterns, again and again — elation, rise, fear, fall, repeat. While every crisis is unique in some ways, a wise investor knows that economic ebbs and flows are just part and parcel. The best strategy is responsive and not reactive: adjust and correct. Don’t be dramatic and over-react.Yes, crises can be painful. But as Davis also said, they are “an inevitable part of any long-term investor’s journey.” Those who keep this advice in mind are much less likely to react emotionally. Which leads nicely to our next morsel of wisdom.    

Keep your emotions out of investment decisions

The father of value investing and author of the seminal investing book, The Intelligent Investor, Benjamin Graham had this to say: “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”We couldn’t agree more. In fact, some of successful investing’s greatest enemies read an awful lot like a list of the seven deadly sins — greed, pride, anger, fear, envy. All of these emotions cause people to get swept up in the feeling of the moment. Throwing advice out the window. This can lead to rash decisions, following the next “hot” thing, or bolting at the first inkling that something could go south. When investors sell as soon as the market dips, as Peter Lynch points out below, they miss out on their investments’ regained value when the market inevitably recovers. They also miss the chance to buy good stocks cheaply. And during market peaks, when they buy expensive stocks, they’re just begging for the crushing disappointment that comes along with the, also inevitable, market drops. For ideas on how to keep emotions out of investing, read our recent post which has great tips for keeping feelings out of finance.  

Use market timing cautiously

From 1977 to 1990, Peter Lynch successfully managed the Fidelity Magellan fund, making a name for himself in the world of investing. He had this to say about market timing: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."Investing in today's world is very different from Lynch's time. However, this kernel of wisdom holds true — if you buy and sell willy-nilly, treating investing like a hobby rather than a strategic tool for financial independence, you're likely to make mistakes and miss out big!NEST Financial’s Sean McDougle holds a similar view, preferring a steady, “follow the data” approach, rather than strategically trying to predict the future or read minds. It doesn’t work. Data does. Take the S&P 500 performance from 1992 to 2012. It earned an 8.2% annual return. Not too shabby. But what if, during those 20 years investors missed the best 10, 30, 60 or 90 trading days? The numbers tell a compelling story.Returns for investors that missed the best 10 days came in at 4.5% annual, only half of what they could have. If they missed the best 30, they realized zero. The best 60? Negative 5.3%. And if they missed the best 90, they earned minus 9.4%! 

The takeaway — stay in the game for the whole game. Don’t dip and out when things aren’t going your way, or you really will lose in the end. 

Think of it this way: One estimate says that from the S&P 500’s inception in 1926 to last month, with reinvested dividends and adjusted for inflation, the annual return would be 6.9%. And yes, that includes the stock market crash of 1929, the Great Depression, the 2002 Dot Com bubble burst, and the 2008 housing crash. Poor returns probably have less to do with market vagaries and political factors, and much more to do with people’s own mistakes.  

In short, keep emotions out of it and stay the course. And if you can’t, find a someone who can help you.

If you’re tired of letting your emotions and market gyrations lead you to bad decisions, why not let us help you? Drop us a line at info@nestfinancial.net. We are an Austin-based, boutique wealth management company. We are passionate about helping Austin families, business owners, and individuals plan for their long-term goals, and stay the course to achieve them. 

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