Building A Better Investment Experience

How are you holding up during these challenging times we're living in? How are you handling the stress that comes from the stock markets—bouncing up and down each week—with unexpected news unfolding each day, causing our emotions to shift almost daily? I want to give you two ideas to help you have a better investment experience, by tuning out the noise and staying focused on what you can control.

Let the markets work for you

The financial markets around the globe do a really good job of valuing securities, even though the future is uncertain. This means that every stock price, at any moment in time, is the best estimate of its true value. All information that can be known about the future of any particular company has already been factored into its current stock price. We can't know the future, and as soon as actual events happen that differ from what was expected, the price changes immediately. This happens for every stock price every moment of every day the markets are trading. So unless we can know the future, we can't know the future direction of any company stock price or the market as a whole. But financial markets, worldwide, have rewarded those who stay invested and think long term.

Keep your emotions in check

Emotions can cause us to see things differently than they really are, tempting us to make bad decisions based on headlines. We confuse noisy, unhelpful information with useful information and this in turn can cause us to veer off course from our long term plan and cost us money in the long run. Remember, even when the markets are down, you don't actually lose money until you sell. We know that major events frequently take place across the globe, but to be a successful investor, it's important to look past the crisis of the day and this requires us to develop a long term perspective on investing.

Let's consider three portfolios. Portfolio A, portfolio B, and portfolio C. Each portfolio has the same risk, but different returns. Let's visualize these returns over time.

Given a choice, I'm sure we would all choose the return experience of portfolio C, which gives us the most positive return over the period. But that's not the whole story, because there's a catch. These are the same portfolio, simply shown over different periods of time. Portfolio A is viewing the return over a single day, and as we know that in any single day, returns could be up or down (50/50 chance). Portfolio B shows the return over a month. And portfolio C shows the same portfolio over a year. As we can see, the longer the time period that we choose to view the return, the greater the probability that we're going to have a positive return.

The interesting thing about this exercise is that we can quantify the amount of stress that we experience by choosing the time period over which we view our portfolio. Imagine that if we were to look at our portfolio and it was up—we would experience happiness and joy. And then imagine that we looked at our portfolio but it was down—that would make us feel unhappy and we would experience a degree of pain. What would happen if we were to total all of the days in which we experienced pain? How much pain would we expose ourselves to?

For example, let's look at the S&P 500 over a 40 year period of time, from 1980 through 2019. Let's also imagine that every time the portfolio was up, you felt really good, but every time the portfolio was down, you experienced pain. Now let's go back and take a look at portfolio A and let's total up all of the days that the portfolio would have been negative over that 40 year period of time. That would total about 19 years of total pain or about half the time period. Now let's look back at portfolio B, do the same thing. Total up all the months that it was negative over the time period. That number would drop to about 14 years of total pain or about one-third of the time. Finally, let's look at portfolio C. If we total up all of the years that the portfolio was negative, it would aggregate only about seven years of total pain or only about one-fifth of the time period.

Let's remember that this is not a different portfolio, but it is the same portfolio; it is only viewed over different time periods. Every crisis of the day may cause you stress as an investor. It may even cause you to want to look at the impact on your portfolio and possibly even make changes to it, veering off your long term path. Remember the lessons of today: it is not how your portfolio looks that matters, it is how often you look at your portfolio. 

Stay the course

As you hear bad economic news or bad market news, you may be tempted to want to look at your portfolio. What this means is, creating more pain than is necessary. A better approach is to take a longer term view of your portfolio and evaluating adjustments needed over time. This approach can contribute to a better investment experience. So remember, let the market work for you and keep your emotions in check.