Recently a communication I received from Vanguard used those words, “Fortune Favors the Disciplined”.
Vanguard’s words are “Truth” and a clever play on a recent TV commercial featuring Matt Damon promoting Crypto. Damon refers to breakthroughs by brave adventurers and says, “Fortune Favors the Brave”. Brave people that are adventurous are exciting and interesting. Brilliant commercial for a very risky activity. More about Crypto below. We like courage and bravery too, but I would not use those words to describe pursuing Crypto. At this link find an information rich blog post on Crypto including a link to Damon’s commercial.
People’s emotions often follow the market's swings. They forget the market will go down after it’s been up for a while and then they are very concerned when the inevitable drop occurs. Of course the drop is temporary and ultimately leads to new market highs not seen before.
The reality is this:
Markets move up and down, in unpredictable patterns, on their way up long term. Memorize this statement especially in times when the situation seems dire.
What is long term? Historically, over any five year period, there’s a high percentage probability that a diversified portfolio is up.
Unpredictable patterns? Investors are forewarned that down markets are a part of the process - but experiencing it brings unpleasant emotions.
So if you know that markets move up and down, in unpredictable patterns, on their way up long term, what are practical ways to deal with it?
The market is supposed to move erratically - that is its basic nature. (Another phrase to repeat over and over!)
It takes discipline to manage your emotions and not act on your predisposition to take action. Not taking action is an action! I recommend reviewing real historical data that shows the many examples of markets moving back up and on to new market highs after a down period. We have those pieces in an easy to digest form.
Since you know that it may take awhile to overcome initial market drops, don’t invest money needed in less than 3-5 years. Investing is not a short term activity.
Just as you must consider the market’s unpredictable patterns as you invest - you also plan around unpredictable patterns when taking out money. Place money you know you will be spending into a stable investment or cash equivalent two years or more in advance. Don’t put yourself in a position in which you must sell securities that are temporarily down.
Timing the market - jumping out of the market to avoid a downturn and then back again rarely benefits as you only know the correct timing after the fact. It adds expenses too. Avoid the temptation! Rebalance, sure. Temporarily slightly reduce your exposure to stocks to manage your concern, that’s fine. But no more than that.
The average person’s predisposition to take action during market volatility, which they should have realized is expected and normal, makes them very susceptible to act on investment scams and poor investments.
There is a constant drumbeat of people preying on your fears! You need to recognize and RESIST your temptation to jump in.
I meet so many people that have been burnt by succumbing to temptation during times of market decline, a part of expected market behavior. Since the market is up about ¾ of the time, we get spoiled and when experiencing the unpleasant ¼ we act as if it wasn’t supposed to happen.
Undisciplined people either exit the market to cash due to market concerns, or jump to other poor “investments” because of great marketing that appeals to them because of their market worries.
What are examples of products sold that are inferior to a classic highly diversified stock and bond portfolio? Each one of these could be its own blog post. I’ll describe each briefly.
Insurance products: Insurance companies are highly profitable for a reason. They have free reign to create new products that have hidden fees and generous commissions paid to salespeople that sell them. Often the product is not an actual investment, but a contract that has underlying investments. You own the words of the contract, not the investments. Basic insurance is an amazingly beneficial tool for financial planning. But once they get away from the basics - not so good.
Hedge Funds: Hedge funds are an exciting activity for the wealthy to lose their money. They have a poor track record and their lobbying in congress gives them the ability to be deceptive about their returns. Doesn’t mean that they are never successful - of course they have their successes but overall as a group over time, not so good.
Commodities: Think precious metals, other materials, land, crops and substances. Substances or “things” contain no human traits of intellectual property or passion. They rise and fall but their long term gains rarely overcome long term inflation. Stocks, on the other hand, significantly overcome inflation over time.
Undefined/New: Today’s example - Crypto. Tomorrow - who knows, but it is coming. Crypto is a computer based process - a human creation, yes, but is an artificial market that defies definition. No history, extremely risky, that may be held up only in that money continues arriving. It smells like a pyramid scheme, or a multilevel marketing scheme. It always amazes me when fear about the market causes people to move to very risky and undefined new “investments” - far riskier than the market.
Why do stocks perform so well? When you bring together passionate humans (think hard work) that are smart (think innovation), together with capital provided by financial markets, and an entire world market to sell their products and services - wealth results! So much development and creation! People in companies want to propel their own careers and earn money to support their loved ones and desires outside of work. That is an unending supply of motivation. We want security and prosperity and are willing to put in the work and thought to do it.
Yes stocks perform very well - but not in a straight line!
Discipline, patience!