Often, all you need to be an excellent investor is a healthy dose of common sense: A penny saved is a penny earned. Buy low, sell high. Don’t put all your eggs in one basket. That said, the best way to achieve these simple goals is not always as obvious. In fact, many of our favorite investment insights may at first seem counterintuitive, as you will see from these three of our favorite uncommon investment insights.
Investment Insight #1: Market volatility is the norm, not the exception.
How often have you thought something like this: “The markets seem so crazy right now. Maybe I should back away, or at least wait until things settle down before I make my next move.”
The problem is, the markets rarely “settle down.” And when they do, we only realize it in hindsight. There are just too many daily seeds of doubt, forever being sown by late-breaking news. We never know which ones might germinate – until they do, or do not. We suggest putting market volatility in proper context:
“Being surprised at equities’ ups and downs is like visiting Chicago in January and being shocked by 8 inches of snowfall.” – William Bernstein
In other words, it’s normal for markets to swing up and down; it’s just part of the weather. For example, according to Dimensional Fund Advisors, U.S. stock markets ultimately delivered positive annual returns in 35 of the 42 years between 1979–2020. But during the same period, investors had to tolerate average intra-year declines of 14%.
Investment Insight #2: Market volatility is your friend.
What if markets were not volatile? What if all the days, in every market, were like November 12, 2019, when the Dow closed at the same 27,691.49 price as the day before? If prices never changed, traders would become unwilling to trade; they would have no incentive to do so. In this extreme, markets would no longer be able to serve as a place where buyers and sellers came together and agreed to price changes. Soon enough, markets would cease to exist.
A world in which prices never change does seem far-fetched, but what if markets were merely far less volatile than they currently are? You would probably soon discover how much you missed those same, downward price swings you ordinarily loathe. That is because volatility implies risk, and higher risk offers higher expected returns. By giving up extra volatility, you also must give up the extra returns you can expect to earn by tolerating the volatility risk to begin with:
“If you’re living in fear of the next downturn, consider shifting your thinking instead of your investments. Focus on controlling what you can control, such as how much you save, or finding the right stock/bond mix.” – David Booth
Investment Insight #3: You can win even if you own some losers.
Wouldn’t it be great to hold only top selections in your investment portfolio, with no disappointments to detract from your success? Of course it would. It would also be nice to hold a $100 million winning lottery ticket. But just as the lottery is no place to invest your life’s savings, neither is speculating on the razor-thin odds that you can consistently handpick which companies or asset classes will be the next to shine.
“Being well-diversified at all times ensures that you will participate in whatever area of the market is the next ‘hot’ story.”
Instead, we suggest building a broadly-diversified portfolio covering a range of asset classes … and sticking with it over time. Being well-diversified at all times ensures that you will participate in whatever area of the market is the next “hot” story. At the same time, spreading your portfolio across multiple asset classes also means you will always be invested somewhere that is not the best performer. This means you are unlikely to ever “beat the market” in a big, splashy way. Here is a helpful way to think about committing to a diversified portfolio during a difficult year:
“On a scale of 1-10, with 10 being abject misery, I’m willing to bet your unhappiness with a diversified portfolio comes in at about a 5, maybe a 6. But your unhappiness if you guess wrong on your one and only investment for the year? That goes to 11.” – Carl Richards
Obvious in Hindsight?
We hope the insights we have shared now seem a little more obvious, but obviousness does not always translate into action:
“‘Obvious’ is often a long way from ‘really believed and internalized’, and in the gap between those two, fortunes are made and lost.” — Cliff Asness
If you are not incorporating these insights into your own investment strategy, you should consider working with an advisor who is.