We would all have been better off if we had behaved as wisely as the Three Monkeys in the first quarter of 2016, or any quarter or year for that matter. Unfortunately, in order to make a living, commentators need to commentate, brokers need to trade and the poor investors are caught in the middle listening to bad advice and reacting to it-buying high and selling low, the opposite of what they should be doing. There is ample evidence to document this investment behaviour as the chart from 1995-2014 below illustrates.
While staying put in equities would have earned an investor 9.9% annualized, or all in bonds, a respectable 6.2% or a diversified portfolio of 60% equities and 40 % bonds, 8.7%, the average investor only earned a paltry 2.5% annualized. How can that be? Sure, management fees and trading costs are a contributing factor, but the biggest part is buying high and selling low, trying desperately to time the market. It’s panicking in and out of stocks rather than just holding on. In 1940, the average stock was held for 7 years, whereas today the average stock is held for 1 month! I suspect all of the information and news that is thrown at us on a daily basis has made us worse investors as it’s feeding on our behavioural biases.
As John Bogle (Vanguard) puts it, “Don’t let all the noise drown out your common sense and your wisdom. Just try not to pay that much attention, because it will have no effect whatsoever, categorically, on your lifetime investment returns”.
Warren Buffett also encourages us to “Turn off your TV. Don’t read the financial section of the paper. Shun market information entirely. Just don’t look and you’ll be fine”.
We have no control over the outcome of what happens with the markets. The best we can do is implement a sound financial plan that looks to minimize unforced errors and risks and gives us a high probability of success. Nothing good can come from constantly stressing out about things that are out of our control, but we can control our reaction to them.
The key to being a successful investor is about remaining disciplined and adhering to one’s asset allocation plan.
I absolutely believe that owning stocks for the long run are the best way for an individual to increase their wealth. However, this is called investing and the price of admission is gut wrenching drawdowns as we have just experienced. If you can accept that this is the way things work, you will be a far better and wiser investor.