David Booth, Founder of Dimensional Funds, said that “the most important thing about an investment philosophy is that you have one you can stick with.”
I’ve been thinking a lot about that quote the last few months. 2018 was one of the first negative years we’ve experienced in the stock market in a while. And while it was a small decline and has since bounced back to near all-time highs, it was still an emotional roller coaster for some.
Best Practices vs Positive Outcomes
I spoke the other day with a prospective client who is struggling to decide which side of the fence he wants to be on with his portfolio. Should he adopt the low-cost, disciplined approach that I recommend to my clients or is it possible there is a better way – one that captures the ups, but avoid the downs?
This investor had bought into the buy-and-hold approach years ago, and said that he got out in 2008 after seeing his portfolio drop by half. “How can you sit and do nothing when you’re losing so much money?” he asked. As a doctor, he felt that doing so was almost negligent. He told me about his best practices and performance benchmarks that he must hit to keep his job. It seemed counterintuitive to him that a financial advisor could recommend a strategy that doesn’t always perform well.
After thinking it over, I decided he had provided me a great analogy. Just like in medicine, there are best practices that can be applied to investing. However, in both medicine and investing, applying best practices does not always produce positive results. If that were the case, people would never get sick, become disabled or pass away. Sometimes doctors do everything they can and should do, but they aren’t able to cure someone.
Likewise in investing, following best practices does not always lead to a positive return. Sometimes we get years like 2018 – or even 2008. The job of a good advisor is not to promise an investment strategy that never loses money. Investing in financial markets involves risks, just like most medical treatments. A good advisor educates their clients on the realities of investing and the associated risks, and then recommends the best course of action for that client.
Who are the Investing Experts?
What makes picking an investment philosophy we can stick with so difficult, is the constant noise we hear from almost everywhere. While we mostly trust doctors to be the experts in the medical field, it seems everyone we know has an opinion about the best way to invest – colleagues, friends, family members. And even the so called “experts” in the field don’t seem to agree.
Unfortunately, many “experts” in the financial industry aren’t really experts at all. Their advertisements and sales pitches are similar to magic weight-loss pill infomercials. They feed on our weakest impulses to have everything quickly and easily – even though none of the best things in life come that way. Much of the financial industry is designed to offer not what is best for consumers, but what sells.
As Upton Sinclair put it, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
And so, the majority of the industry will continue to sell magic pills that have little chance of getting you where you want to be.
Investing Best Practices
Fortunately, there are some principles that nearly all good advisors, academics and other experts in the field agree on. Here’s a sample:
1. Markets reward investors over the long run for taking risk and providing capital
2. Diversification reduces risk
3. The odds of successfully timing the market or picking stocks are incredibly small
4. Discipline is key – emotions almost always lead to bad decisions in investing
5. Costs matter – only pay for things that add value
Investing best practices, just like medical best practices, don’t always promise perfect results or the easiest path. But what they do offer is the best chance at success.
In order to reap the rewards of those best practices, you have to follow them – even when your emotions tell you to run. You can’t sell at the bottom of a bear market. “Buy and hold” doesn’t mean “buy and hold as long as the market is going up”. In order to reap the long-term benefits of investing in markets, you have to actually hold investments for the long-term.
If you’d like to partner with an advisor who helps you understand, implement and stick with an investment philosophy based on sound research, I’d love to chat.