Investing For the Long-Term
Posted March 2, 2020
Posted March 2, 2020
After concluding the worst week in the stock market since 2008, I need to write about a common question that I’m asked about. I’m often asked about what I think the market is going to do. There is a major misconception that people in the financial industry have some special insight into what the market will do. I understand where this misconception comes from because every time you turn on the news or pick up a magazine, someone is talking about a coming recession, the 10 best funds for the coming year, or why “this time is different.”
The problem with subscribing to the belief that someone actually knows what will happen in the stock market is admitting that people can actually see the future. Analysts and economists can make educated guesses about what will happen, but they are still just guessing at the end of the day (and they are usually wrong more than they are right). However, what’s not a guess is that Wall Street makes money when people buy and sell stocks. There is a massive incentive for Wall Street and the financial media (funded by Wall Street advertising dollars) to encourage trading and sensationalize the next major “event.”
Since the turn of the century (1900), our modern-day US economy has endured 2 World Wars, the Korean War, Vietnam, 3 wars in the Middle East, a Great Depression, a Great Recession, along with outbreaks, government shutdowns, and other countless show-stopping newsworthy events. Through it all, America and the rest of the world’s economies, along with their respective stock markets, have kept humming along as the greatest wealth-building mechanism in world history. Sure we have had momentary dips in the stock market due to short-term crises. Still, the beauty of our economy and the stock market, particularly, is that it’s driven by the greatest companies in the world looking to deliver maximum shareholder value no matter the latest crisis.
This brings me to the idea of investing vs. trading. As a financial advisor, I believe that one of my jobs is to help my clients invest correctly to meet their goals, and this usually means taking an investment approach measured in decades, not days, weeks, or months. The only reason for a drastic shift in investments would be a shift in the market’s underlying fundamentals (think law changes) or a change in a client’s goals. Proper investing takes advantage of financial science and understands how to build a portfolio to achieve optimal long-term results properly.
Trading focuses on capitalizing on movements (up or down) in the market and predicting what the market will do. Frequent trading can cause taxable events, trading costs and has historically shown to deliver lower than market level returns. The problem with trading is that the trader doesn’t just have to be right once. They have to be right twice. They have to guess when to sell correctly, but they also have to guess when to buy back into the market correctly. This starts an ongoing cycle of guesswork that, according to every study out there, leads to lower lifetime performance.1
So while I absolutely stay abreast of what’s happening in the world and what the markets are doing, I’m less concerned with the short-term fluctuations in the market and more interested in what kind of law changes could potentially affect my client’s wealth long-term. Market volatility is something that we expect and want as investors. It’s what gives stocks higher lifetime returns than cash or bonds. Without this volatility and “risk,” stocks wouldn’t have a historical return of 10%. Volatility like this past week is a long-term investor’s friend but a short-term trader’s nightmare.
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