How to take the stress out of investing
By Tyler Simms, CFA 25 October 2018 3 min read
Most of us are aware of the stresses that personal finance can pose at various stages of our lives. But for many, investing can be a particularly intimidating and nerve wracking plight.
This anxiety stems largely from the fact that investment markets are turbulent and highly unpredictable on a day to day basis. Adding fuel to the fire is the torrent of market news headlines which, as we know, are rarely optimistic and mostly promote fear and a sense of urgency. One of my favourites came earlier this year at the depths of January’s market pullback when Royal Bank of Scotland admonished investors to “sell everything!”, a snippet that was quickly disseminated to water cooler conversations.
The age of connectivity and transparency has resulted in more investors than ever knowing the daily close of the Dow Jones Index, WTI prices, 10 year treasury bond yields, etc. In sum, more data points to fret about. According to a recent poll from Edward Jones, only 22 per cent of Canadians said they felt confident that they are prepared no matter how volatile markets could become. Even more concerning is that 42 per cent of the same sample set said they were unsure of their ability to withstand market volatility.
In explaining the market’s frenetic nature, investor Ralph Wanger once likened the market to “an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum.
At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.”1
But ignoring the ‘dog’ in an increasingly crazy world can be challenging and investors often succumb to the urge to make reactive and abrupt changes to their long-term investment strategy. The truth is, doing nothing is almost always the best approach.
Many investors struggle with this paradox because investing is a discipline unlike many where there is no direct correlation between effort spent and the quality of the outcome. As William Smead once quipped “Your common stock portfolio is like a bar of soap. The more you rub it, the smaller it gets.” 2
And there are numbers to prove it. Each year Dalbar, a US-based leader in financial services market research, conducts a study called the ‘Quantitative Analysis of Investor Behaviour’, and 2015’s results are consistent with the previous 21 years’ results.
Particularly shocking is the comparison of the average equity fund investor’s returns with those of the US stock market as measured by the S&P 500 Index: investors have underperformed the market benchmark by an average of 6.7 per cent per year over the past 30 years. Furthermore, their analysis shows that the most significant cause for underperformance is investor behaviour.
All too often, investors fall into psychological traps driven by fear, greed or other outside influences, which cause them to make abrupt changes to their portfolio at the expense of their long-term strategic plan.
The best way to close this ‘behaviour gap’ is through disciplined planning, beginning with the development of an Investment Policy Statement (IPS). Your IPS should act as a guiding light for your investment strategy and remind you of the purpose of your investment program through all market conditions, and over all timeframes. It will include a blueprint of a properly constructed portfolio, one with an appropriate risk level, sufficient diversity, high quality investment managers, and low fees –a portfolio built to provide the best chance of attaining your financial milestones, in spite of what the market throws our way.
Successful investing requires a long-term view and extreme patience, and investors should expect to feel the pressures of short-term noise along the way. By formalizing a vision and remaining disciplined, you’ll be better fit to diffuse the pressures of interim market volatility and refocus on your ultimate objectives.
1 Bernstein, W. J. (2002). The four pillars of investing: Lessons for building a winning portfolio. New York: McGraw Hill 2 W. Smead. (2016, March 29). Toll Bridge Stocks: Don’t Just Do Something, Sit There. Retrieved from smeadcap.com 3 DALBAR, Inc. (2015, December 31). DALBAR’S 22nd Annual Quantitative Analysis of Investor Behavior. Retrieved from qidllc.com