Monday, December 30, 2013

So easy to lose perspective...

After a year like 2013---assuming the market doesn't drop 30% tomorrow---it's easy for investors to lose perspective. As is always the case after a significant market move (this go-round an advance), folks come out of the woodwork asking me questions, or making statements, such as the following four (these are actual examples). Following each I'll answer, in italics, with what I might have been thinking, but probably didn't say to my inquisitor:

  • I have a little extra cash, is this a good time to invest? Or should I wait, since the market's up so much? I'll tell you later---like, say, in 6 months or so.

  • Shouldn't we take some off the table now, since the Dow's at an all-time high? Let's see, the Dow hit its first all-time high this year back on March 5th. If we took some off the table at every all-time high since, you'd have been all cash months ago.

  • Since I don't see a bubble on the horizon, I'd like you to go ahead and invest my cash allocation into the stock market. So you have the experience, wisdom, extra sensory perception to see bubbles on horizons? Then why the heck do you need me? Especially since I don't.

  • And my all-time favorite: What's the market going to do next year? Yeah, I always know what the market's going to do, that's why I'm taking your call while afloat on my 300 foot yacht in the Mediterranean.


The thing is, we like what we see on our statements. We identify with the price per share of our holdings on the day before our statements were cut, and we forget everything we've read on this blog site: Everything about volatility, about not identifying with our monthly statements (or our account value displayed on our brokerage firm's website), about how down cycles are essential to long-term investment success, about how utterly dangerous it is to try and time the stock market, and about how no human being we see on television possesses the knowledge of all the moving parts---let alone how they interact with one another---to even begin to accurately (with any consistency) predict markets in the short term. We grab our calculators and start playing with numbers: We imagine paying off the house, and what no house payment means going forward. We apply a percentage rate and figure how much income we can take if we retire today. We start fiddling with rates of return and figure that if our portfolio grows by another X% from here for 10 more years, what we'll have if we retire then. And so on...

And, you know, that's all okay. As long as we don't let our fantasies---or our understanding that the stock market has to contract every so often---run away with our investment disciplines.

If you, particularly if you're our client, haven't yet read Our View Going Forward, please do. It offers a fairly in-depth look into how we approach the business of investing.

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