“Most people make their investment decisions on the basis of an unreliable hodgepodge of half-baked logic, biases, hunches, emotion, and vague fantasies or fears about the future.” – William Green, author of Richer, Wiser, Happier
We hear a lot of off-the-wall theories.
The banking system is going to collapse.
The U.S. is going to be hit by a nuclear missile.
Tariffs are going to tank the market.
The blitz of information, conspiracy theories, and fear mongering can lead to emotional investment decisions.
Much like a computer that got hit with a virus, occasionally we need to ‘return to default settings’. Sometimes, we all need a re-center.
When you feel like the world is going to hell in a hand basket and you have the urge to make an emotional decision, err on the side of…
Doing Nothing
Fidelity performed a study on their best-performing client brokerage accounts. Over a 10-year period, they found that the highest returns came from the ones where the account holder was dead.
The second best were the ones that had forgotten they had investment accounts.
Assuming you have a portfolio that reflects the way you feel about risk, compliments your financial plan, and allows you to sleep at night, err on the side of doing nothing.
NOT Clicking Buttons on the Internet All Day (Turn off the TV)
It’s easy to go down rabbit holes, conspiracy theories, and doomsday scenarios. Remember, train wrecks get attention and eyeballs.
In our July 2023 post, “The Retirement Propaganda War,” we highlighted…
“The media has figured out anger, fear, disgust, and sadness drive more clicks, opens, and eyeballs (which leads to more ad revenue). Stories that are neutral or joyful are less interesting thus drive lower engagement.”
According to Scott Galloway, author of The Algebra of Wealth, a study of happiness found that social media use ranked dead last, out of twenty-seven different tracked leisure activities, in making people happy.
Err on the side of clicking fewer buttons online and turning off the TV. Go for a walk. Call a friend. Lift some weights. If you can’t help yourself, click on content that challenges your views rather than confirms them.
Optimism > Pessimism
We are blessed to live in the greatest country on Earth. Sure, we have problems, but I occasionally think about what my life would look like if I was born in rural Siberia. In my opinion, I’ve won the lotto when it comes to the country I was born in.
Life’s too short to worry about boogeymen under the bed.
Morgan Housel said it best, “The best financial plan is to save like a pessimist and invest like an optimist.”
This isn’t baseless cheerleading…optimism has paid off handsomely for U.S. investors.
Source: Creative Planning
The above chart shows the probability of a successful investment outcome by time period for the S&P 500 (1928 -2024). The longer the holding period, the greater probability of a favorable outcome. We are not advocating to piling into the S&P 500, however, the pessimist should know what they are betting against.
Today’s environment isn’t unprecedented or more fraught with risk than previous periods. Throughout history, there’s always a reason to sell…
Source: Ritholtz Wealth Management
Err on the side of optimism. A wise person once said, “Pessimists sound smart. Optimists make money.”
NOT Mixing Investing & Politics
The party you favor is in power? Everything is great!
The party you favor is out of power? We are doomed!
In a story as old as time…it doesn’t matter.
Source: Creative Planning
The above chart shows S&P 500 returns for every sitting President since 1929. The market tends to move higher regardless of which party/President is in power. If the market goes down, it’s usually something beyond a politician’s control (Great Depression, Great Financial Crisis).
Err on the side of checking your political biases at the door. History has not been kind to those that mix emotional political takes and investment decisions (quite the opposite).
Embracing Uncertainty
I don’t know what happens in the next week, month, or year. No one does. I will say that the biggest risk or the next market calamity will be something no one is talking about today.
True risk is what’s leftover after you’ve thought of everything.
Stop playing the market oracle, seeking out predictions, and craving certainty. The only certainty in investing is uncertainty.
If you’re worried about an ugly market, one would do well to acknowledge we will all experience pain in the inevitable market selloff. We should turn our focus to mitigating damage…
- Pay down debt
- Reduce expenses
- Build a cash position to fund the next 6-12 months of expenses
- Rebalance your portfolio
- Manage position sizing
- Stress test your portfolio to see how it would hold up if the market sold off by 20% or 30%
Err on the side of embracing uncertainty. If you’re worried about an ugly market environment, preparing beats predicting.
If you’re feeling down in the dumps due to the endless stream of negative headlines, err on the side of doing nothing, clicking fewer buttons on the internet (turn off the TV), checking politics at the door, being optimistic, and embracing uncertainty.
What do you err on the side of? Shoot us a note insight@pureportfolios.com