It’s often said that the masochist and the optimist are way more similar than one would have thought. Individual investors often find themselves wondering which one they resemble more.
Even those who consider themselves optimists have to admit the following: investing won’t be easy in the next couple of years. According to Ralph Wanger, ACRNX’s manager, a period of fairly tough markets is ahead of us. Only those who have substantial skills are going to prevail.
If you are still here, reading financial publications, then the mighty market hasn’t scared you away. That’s great news since stocks remain every investor’s best bet for the long run.
Jeremy Siegel stated that the best bull market ever lasted from 1982 to 2000 when real returns were around 15.6% a year. When you compare that to the historical rate of equity returns, that’s more than double. Regression hasn’t been enjoyable.
But, you can still make money. It’s just that the rules have changed, and some tried rules have become vengeful now. It’s better to throw the old playbook away and adjust to recent changes. Long-term investors can succeed with the help of the long haul in the new era, regardless of possible market changes.
Firstly, let’s go over the rules of the game.
Know Yourself
Numerous investing strategies exist – deep value, active trading, buy and hold, index investing, etc. Before doing anything else, investors should determine which type exactly they are.
According to Michael Mach, EHSTX’s manager, to be a long-term investor, you have to know yourself. He claims that the key is to combine a rational investing approach and your personality. A consistent application will result in success.
If you don’t mind taking a large risk, and you can keep your cool in periods of great volatility, you can probably handle a risky strategy. As the majority of investors start to lose their cool, the long run often focuses on strategies designed to avoid excessive risk and marketing timing. Instead, longer time horizons and fundamental analysis are favored.
One more thing, be honest with yourself. You have to know how much time you will sacrifice to track your investments. For example, avoid taking big stakes in a couple of companies in the quickly-evolving biotechnology industry, if your plans don’t include keeping up with sector development.
Diversify
When it comes to investing, diversification is in all likelihood the simplest truth there is. Also, it is most often misconstrued. Back in the 1990s, asset allocation used to mean 100% stocks for many people, and around 90% of those stocks were large-cap growth.
Basically, all investment vehicles experience ups and downs. But, a large number of individual portfolios are made of holdings that all move up at the same time and then go back down again at the same time.
The founder and CEO of Legend Financial Advisors, Louis Stanasolovich says that investors need diversification. By that, he means that they need to diversify away from large-cap domestic equities. According to him, when you buy two Janus funds, three Fidelity funds, American Funds Growth Fund of America, and an S&P 500 index fund, that’s not diversification.
In order to achieve true diversification, investors have to assemble portfolios by using investments that have lower correlations to one another. Here’s an example: for equity holdings, you should consider paring back your large-cap weighting and improving exposure to international stocks, emerging markets, real estate investment trusts, and smaller-cap stocks.
The Reinvention of DIY Investing
One of the supposed hallmarks of the bull run from the 1990s was the rise of the DIY investor. When the stock market bubble collapsed, some experts declared the DIY movement dead.
There’s a lot of irony in that. Investors got over their heads in the recent years mainly because the notion of DIY investing was cast aside, or just poorly redefined. DIY investing isn’t just reading The Wall Street Journal or watching business news, listening to analysts or getting inside tips from your broker; it’s much more. It requires hard work and doing your research before making any decisions. If you just buy a stock that someone mentioned on CNBC, that isn’t doing it yourself.
To reinvent DIY investing, remember what Peter Lynch said in 1989. He advised investors to stop listening to professionals, ignore the recommendations of brokerage houses, hot tips, and suggestions from their favorite newsletter, but do their own research instead.
However, this doesn’t mean that one should disregard all stock analysts, mutual fund managers, business news experts, etc. There are various trustworthy and intelligent people who can help you become a better investor. What’s more, countless are at your disposal in the Internet age. To put it simply, trust people, but verify. These resources should help your research, not replace it.
Passion For Investing, Not Investments
To become a successful DIY investor, one will need plenty of fundamental analysis, analyst reports, going over company statements, and online and offline research. Passion is a must. However, try not to be too passionate about your investments. Fear and greed are not great emotions to be driven by, at least not when investing. So, focus on being unemotional about your investments.
Emotions shouldn’t get in the way, that’s a common truth. It is even more important to remember this during unstable times, when there are a lot of sudden moves on the market, and no sustainable upward trend. Remember to stick to your guns, don’t just follow blindly.
In September 2002, many people thought the world was coming to an end, and wanted to sell everything. Then, in October, tables turned, and they wanted to buy everything. Neither of these two ideas proved to be sound.
The New Era
Let’s take a look at the market peaks of 1929, 1966, and 2000 to get a sense what the new era could look like. It wasn’t until 1954 and 1982, respectively, that stocks returned to their previous heights. Take inflation into consideration, and that’s 1955 and 1994, according to Wanger.
We can’t be sure if another quarter of a century will be needed to get back to the levels from March 2000. Either way, investors have to realize that getting rich quickly isn’t the right recipe for success in this market. Also, overburdening technology isn’t the best idea either.
When the energy bubble burst in 1980, here is what happened to the energy sector. For energy stocks, it was the best of times and then the worst of times. Similarly, technology stocks suffered, and they may keep sliding.
However, this shouldn’t make you avoid all tech stocks. Companies like eBay and Qualcomm managed to keep record earnings and revenue growth during the industry’s worst downturn. In the meantime, giants like Microsoft have made themselves more appetizing as stable performers by ushering in dividends. That, would, however, go against all bubbles in the 20th century, in case tech was to recommence leadership in the new era. In order to stay safe, keep technology light.
Nobody can know for sure what the next decade holds. Also, it’s impossible to say if stocks will experience a fourth down year in a row for the first time since the Great Depression. If we rely on the post-bubble history as an indication, quality companies could outperform.
Marshall Acuff, the founder of AMA Investment Council, says that everyone should stack as many things in their favor and cut down speculations to a minimum. What’s important is the price, a clean balance sheet, a dividend-paying stock, and a high rate of return. He also says he’d keep his growth, as well as valuation/risk growth expectations conservative. Being in a hope category isn’t a great choice.
The 7% Solution
It’s natural that expectations get out of order with the 18-year run of 15.6% returns. Over a very long haul of 200 years, stocks return around 7%, according to Siegel’s research. Both companies and individuals could anticipate the broader market to give back the historical average over the course of their investing lifespan.
However, don’t expect double-digit returns or you’ll be disappointed.
When you get your expectations right, you will realize that 7% returns aren’t that bad. Your money will double every 10 years. Those who aim for a more sensible 7% return are less prone to digress from the investing game rules. Lower your expectations, and it will be much easier to be an optimist, rather than a masochist.
As this text column started on a negative note, here’s a bit of cockeyed optimism for the end: The 2000s decade may be the same as the 1930s, meaning the worst for investors.
There was only one decade when market averaged a loss was (from 1930-1939), resulting in a negative 0.05% average yearly return. So, how is this exactly good news? Managing director at Eaton Vance, Larry Sinsimer, draws attention to the fact that the average annual market return has been a negative 14.5% this decade. Thus, to equal the 1930s, the stock market will need to give back 5.6% per year on average. In order for a decade to have a flat return, the markets would need to give back 6.5% per year.
