“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham
Let’s reset our assumptions about investing. This means we have to set aside our experiences and no longer call them “truths.” If we can maturely set aside our personal experiences and join the mature conversation wrapped in evidence and logic, it is likely we’ll have a successful investing experience. But we have to apply the following five rules to make it work:
Rule #1: Stick around for at least four and a half years.
This is the time it takes (56 months to be accurate) for a market cycle to experience an up and a down. Some people bail when it goes up because they assume others are making more and they don’t want to miss out. Others sell when it goes down because emotions and headlines hijack their brains. Stick to the plan. Successful investors don’t abandon the strategy without experiencing the results over a full market cycle.
Rule #2: Stay in 10 years.
There is a 94% chance that you will not lose money if you stick around 10 years. Yes, there is a chance you could lose money after 10 years, but it’s low. Consider that the odds are in your favor and acknowledge that no long-term investment is completely riskless.
Rule #3: Don’t speculate.
If you take on too much risk by betting on certain sectors (i.e. energy, technology, etc.), it will take a long time to recover if the sector gets beat up. For example, if you lose 50% of your investment of $10,000, it will take 100% to break even. This 100% rate of return isn’t easy to collect. Maybe you have inside knowledge of a stock or sector. Let’s assume that you place a “bet” and it works. This scenario can be even worse than losing the first time because it begets overconfidence. The stock market has a peculiar way of making overconfident investors feel defeated.
Rule #4: Avoid Wall Street gimmicks.
Wall Street gimmicks typically use backtested strategies that haven’t really been tested. The gimmicks often have no track record and are based on theory from really smart people with PhDs and MBAs. Despite the attraction, don’t get sucked in until they have been tested with real markets for 5 to 10 years in the exact method that you would invest.
Rule #5: If you are accumulating, you should stay aggressive.
To measure how aggressive you are, check your investment portfolio beta. Beta measures volatility relative to the stock market. If it is less than one, get it in the ballpark of around beta one. If you get it closer to one, you will be closer to the overall stock market’s characteristics (returns, risk, etc.). Many people take on too little risk (beta of .5) while accumulating and fail to make the money work. If you are diversified, don’t fret about getting a beta of one. From 1825 to 2013, the market was up 71% of the time. The odds are in your favor, despite what the doomsayers speculate.
When we invest in our PAX Financial Group Financial Planning office in San Antonio, we consider these rules to help us avoid emotional investment decisions. The investing marketplace is filled with noise. Create rules and principles to guide your investment decision-making process.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Stock investing involves risk, including loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.