If you’ve been listening to the news lately, you may have heard of the cryptocurrency company that has had to file for bankruptcy. The dollar figures are huge, and undoubtedly, many people will be affected. Makes you think about all pitfalls that investors must avoid, and all the mistakes they may make along the way. It’s so hard to stay on the path to your financial goals, isn’t it?
What are Investing Fads?
One aspect of investing that makes it so difficult to stay on the path is the multitude of fads out there. What’s an investing fad? It’s any kind of trend or hot tip of the moment in the market - it could be a meme stock, or it could be a sector that all of a sudden becomes popular. Basically investing fads are largely based on emotional reaction; typically they are fueled by excessive enthusiasm and irrational fear.
Example of an Investment Fad
Here are just a few fads that have made headlines in recent times. If you didn’t fall for a crypto investment strategy, then maybe it was cannabis stocks that got your attention. If it wasn’t cannabis stocks that lured you, then maybe it was a meme stock, or you were tempted to go to cash at the onset of the pandemic, thinking “this time it’s different.” (It wasn’t.) If people aren’t panicking out of the market, then they’re jumping into the market, following fads. Just like the many people who - fearing they might miss out - jumped into the cryptocurrency fad.
Fads come and go. Successful investors are in it for the long term.
Regardless of all these fads, the fact remains that the most recent downturn will at some point be behind us. We will establish a new high, we'll eclipse the previous high, and eventually, the Dow Jones will move past 37,000, then 40,000, then 45,000, then 50,000, and on and on.
If you don't believe me, then just go to Yahoo Finance and type in ‘Dow Jones Average’ or 'S&P’ and check out what that number said on the day that you were born. Then compare it to where we are today. Whatever you use as your starting benchmark, we will move past these milestones in the future for no other reason than that's what rational profit-seeking companies do: they grow. In the future, on any given day, the equity markets will continue to hit new all-time highs.
The Dangers of Fads for Investors
And just like there will be many highs, there will always be many investors who will say, “I lost money in the stock market,” or “The stock market is too risky.” In response to that statement I must point out, “How in the world would somebody lose money in, for example, the S&P500 over the long term?”
Certainly, over the course of 100 years you wouldn’t, but let’s keep it to just about any 30-year rolling period and you will find that it’s been reliably compounding away. In fact, the S&P has been growing at a rate of about 10% a year on average if you look at these 30-year periods. How can you look at an average rate of return of 10% and conclude that it’s risky?
“Success for long-term investors is not due to intelligence, but largely due to the wisdom of not being susceptible to whatever is the fad of the day.”
I did the calculation last night. A hundred thousand was invested in the S&P 500 in 1992, about 30 years ago, assuming the reinvestment of dividends would be worth something like 1.6 million dollars today. And what has happened in the world since 1992? Well, “only” two of the largest declines this world has seen since the Great Depression amongst many other corrections. We have a term for people who have been able to weather 30 years of ups and downs in the stock markets; we call them “true investors.”
People who know how to put money away are “savers,” but those who can stay invested through good times and bad times, are the real “investors.” And what do you call people who react to what’s going on in the outside world? I called them doomed or fatally mistaken. I'll quote one of my favorite writers, Nick Murray, who says that “Investment failure is not caused by the equity markets; it is entirely a human endeavor.” Success for long-term investors is not due to intelligence, but largely due to the wisdom of not being susceptible to whatever is the fad of the day – crypto, cannabis, pandemic, euphoria, going to cash, or some other asset allocation that temporarily reduces your anxiety level.
The Path TOWARD Success
That's why at Beck Bode, our role as advisor is to intervene in that process (the process of you diverting from your stated plan) so long as our clients will allow us to do so. Can our potential client succeed long-term as an investor without our guidance? Can our potential client succeed long-term given everything that we don’t know about the near- to intermediate-term outlook of the economy? Is the state of the economy even relevant given that we know that the equity markets have produced approximately 10% per year over long periods of time? This tells me that the American economy is going to prevail.
Remember what we said earlier? As long as rationally managed profit-seeking companies are represented in the market, then those markets drive the US economy forward, and in the process reward their owner. If you’re invested in the markets, then that means YOU – the investors in those firms. Who will fail? Due to the unfortunate fact that they are hardwired to quit, unfortunately, it is ‘savers’ who will fail.
Avoiding the Emotional Impulse
Every day our clients feel the impulse to flee the markets or to chase something new. I’ll confess to you: I'm no different. I feel the same way, but my job is to not act on that impulse. Say someone sends in their hard-earned money, they roll over their 401k or turn over their entire portfolio. On a hard day in the markets, the impulse is still there to think “Geez, maybe we should dollar cost average in… maybe we should wait.” It's human nature to feel this way. And yet, our clients hire us and rely on us to see past the here and now, to see past the newspaper articles and talking heads on TV, and instead to show them the path to long-term investment success without which they are doomed.
As advisors at Beck Bode, we are the antidote, so to speak, to all these emotional impulses that our clients experience. Human nature being what it is, we will never run out of people we can help. But it's important to note that someone who wants to be a client of ours not only has to need the help, (indeed everybody needs the help), but also must want the help. This brings me back to “Plan the dive. Dive the plan.” Our job is to work with people who are willing to allow us to plan the path to their goals and dreams, and then willing to dive into the unknown and uncharted waters of the markets so that we can, together, work toward reaching their ultimate destination.
Ben Beck is Managing Partner & Chief Investment Officer at Beck Bode, a deliberately different wealth management firm with a unique view on investing, business and life.