It’s early April, the first quarter just ended, spring (pollen) is in the air and The Masters is on television. Last week, Augusta National played host to eighty-seven of the best golfers in the world. Eighty-one of these are professionals and six are amateurs invited by Augusta National to compete in one of the most prestigious events in golf. Sitting back watching the tournament, it occurred to us that there are tremendous similarities between investing and golf.
The first quarter of 2018 saw the return of market volatility, which we know is normal, but wish it wasn’t. Similar to playing a round of golf the market has its ups and downs. While it might be frustrating in the short term, we understand that normalcy eventually returns.
As the chart below illustrates, the recent volatility investors experienced has been a long overdue.
Due to lower than average volatility over the past few years many of us have forgotten that volatility is normal. This can be explained by the concept of Recency Bias, a phenomenon in which investors use our most recent experiences to predict what will occur in the future (much like a golfer who has been playing either well or poorly believes this trend will continue into the future). As you can imagine, this is a very exciting or very scary thought depending on which side you are on. This same thought often crosses our minds based on the recent market performance and overblown news media reports.
When markets are down many investors believe it will continue to get worse which causes them to either sell at the wrong time or avoid investing all together. When markets rise many investors believe the good times are here to stay and we attempt to ride the wave as long as we can, often losing sight of our goals. Both lead to unrealistic expectations and more importantly poor investment decisions. The habit of using recent results to control our thoughts is one of the major reasons investors (and golfers) fail to meet their goals.
The key to successful investing is to keep your emotions in check and manage your investments by focusing on the things you can control. These include maintaining a well-diversified portfolio, choosing managers aligned with your goals, minimizing costs, and investing in a tax efficient manner.
A well-diversified portfolio is the foundation of sound investing, allowing investors to weather volatile markets with less stress. The strong performance of some investments potentially offsets the poor performance of others.
Choosing Investment Managers
Contrary to popular sentiment, all investment managers are not created equal. The key is to identify those managers that have a similar investment style to your goals. Some managers focus on preserving assets while other are aggressive in their growth goals. If the wrong choice is made the portfolio may experience more volatility than the investor can stomach. This can lead to poor decisions that will prevent the investor from reaching their goals.
Minimize Investment Costs
Minimizing costs is not about choosing the least expensive manager but rather choosing the manager that earns their fee with strong risk adjusted performance. A manager who charges a lower fee but has more risk and poor performance would be considered undesirable. On the other hand, a manager who charges a higher fee but has an extensive track record of outperformance with lower than average risk could be advantageous. Too often, in our headline dominated world, general guidelines are established to make investors believe investing is simple. However, financial security is the goal, not ease of use, and general guidelines can work to the detriment of investors if applied incorrectly.
Tax Efficient Investing
Paying more taxes than necessary is something that most investors oppose strongly. When properly diversifying a portfolio, it is important to insure that tax efficient investments are utilized in accounts subject to current taxes. Similar to choosing an investment manager, it is very important to organize your investments by the tax consequence and understand the goal of each account.
Now that you have mastered the fundamental side of investing, let’s look at the emotional side. Most investors pay little attention to behavioral finance and, as a result, cause themselves unnecessary worry. Below are a few quick concepts we believe investors can use to reduce investing stress.
Look in the rear-view mirror
Most investors compare their current account balance to the balance on their previous statement. This habit alone can lead to unnecessary stress. Investors would be better served to compare their current account balance relative to their position further back. Sometimes it helps to take a look back and see how far you've come. It can be easy to forget the progress you made over the years. For example, what was your value five years ago?
Remind yourself that nothing lasts forever
Last year the stock market rose for twelve consecutive months. This is very unusual. So far, this year, we have experienced more market volatility and, as we discussed above, volatility is normal. Over a short time horizon the market can be very unpredictable, but the long term trend has been very rewarding for investors.
You are Unique
Sometimes it’s easy to get caught up by what we hear is a “good return.” Each investor is unique and should not compare their return to any other investor. Being a similar age or living in the same neighborhood does not translate into being comparable investors. Previous savings habits, unexpected expenses, different family dynamics, different goals, etc. all contribute to making each investor unique. Always remember your investing is completely independent of any other investor.
So as the market volatility returns please remember successful investing, (just like golf), is based upon prudent decision making and managing your emotions.
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