Updated: Nov 15, 2019
Markets have been volatile this year to the chagrin of some and delight of others. Count me in the camp of those delighted with volatility because I believe volatility is not the boogie man or the monster under the bed. Far from it! Volatility is to us an ally that creates opportunities for patient investors to profit from the actions of others who are letting emotions get the better of them. Rather than drifting with every new wind, we have chosen a philosophy and portfolio design which seeks to benefit from volatility while remaining diversified as a way of managing risk. We stick with it too. While others wring their hands over the latest “crisis,” we stick to the same plans we have had for years that allows us to sleep soundly. At Provident the theme of the day is always, risk adjusted asset allocation, diversification and rebalancing. We want investors to stop asking, “what’s working now”, rather we want them to ask, “what always works”.
Becoming a smarter investor means not letting the emotional part of your brain wrest control of your portfolio from the cognitive logical part. I’m reminded of the TV classic, The Andy Griffith Show. Think of the cognitive part of your brain as Sheriff Andy Taylor and the emotional part as Deputy Barney Fife. I apologize to anyone unfamiliar with the series. Suffice to say, Andy is calm and methodical, while Barney tends to be more of a loose cannon. Barney is ready to go off in any new direction, and frequently does, which requires Andy to reel him in before he gets into too much trouble. There’s a tendency with many investors to want to “do something” when markets are either going down or your portfolio is not going up as much as you think it should. This tendency toward being reactive, chasing current trends, getting bored, jumping in and out of markets or changing strategies tends to be counterproductive at the least, and sometimes disastrous. Want proof? Some of the most thorough studies of investor behavior are those done by DALBAR Research. Their most recent study of investor behavior found that from 1985-2014 the average equity fund investor earned a paltry 3.79% overall annual return while the S&P 500 over the same period delivered an average annual return of 11.06%. So, investors who simply used a low-cost S&P index fund far outperformed the average investor if they remained invested and didn’t allow their emotions—fear or greed—to get them off the path. Of course, it was a ride that had double-digit down years as well as double-digit up years.
The trouble is that we’ve never found anyone with a long-term track record who knew ahead of time which was going to be the up years. I see many who miss most or all the up years by remaining on the sidelines in money markets or fixed funds. They’re proud of missing down years but seem oblivious of the fact that they may be losing considerably more money from staying out of markets in the long-term than the occasional market downturn. And many tend to fall behind in terms of the buying power of their dollars after factoring in inflation which is there whether they factor it in or not. So, what will China do? What will oil do? Who will be the next president? If you’re investing, or not investing based on those questions, I suspect your long-term performance is sub-par, at best when examined under the cold logic of a portfolio analysis. So I will ask you this....Do you want to be an Andy or a Barney with your money?