Protect yourself by remembering the obvious.

Ben Carlson starts his most recent blog with quoting this headline that appeared on CNBC a week or so ago.  Reading it you'd be forgiven for thinking 'wow, David Bianco works at Deutsche Asset Management, that's a big company, and he's being quoted in CNBC, he must be a really smart guy'.

A 5% pullback could happen within weeks, here’s how David Bianco of Deutsche Asset Management says you should protect yourself

I have been in this industry for almost 15 years and it still amazes me that people get paid to make these sorts of predictions.  Here's the truth.  On average, the market falls by 5% or more about three times a year.  So let's say once every four months or roughly once every 16 weeks.  And THIS GUY is getting quoted in CNBC for saying 'a 5% pullback could happen within weeks'.  Yes it could, and yes it will, based on a historical analysis of what has always happened, year after year, from about 1900.


It's like the papers here in Cayman running a headline 'Cayman, it's September, it might rain tomorrow, here is how to protect yourselves'. And then something along the lines of 'cancel all your plans, stay inside, and don't move'.  Well, that would ruin your day.  Headlines like this from CNBC ruin people's financial plans, either because that's enough to scare you from getting into the markets, or because it's enough for you to panic out of the markets.

So how do we protect ourselves from this sort of headline?  Ben Carlson likes to remind himself of a few simple and obvious truths about investing that, in the heat of the moment, it's easy to forget.  You can read his full article here and here is a list of my favourites with my comments added (in italics).

1. If you need to spend your money in a relatively short period of time it doesn’t belong in the stock market.  This is spot on.  I tell people all the time - if you need the money within the next fives years, keep it in cash.  You don't want to risk being able to buy the house you are saving for, sending your kid to university or paying for your daughters' wedding - those things are too important.

2. If you want to earn higher returns you’re going to have to take more risk.  I would prefer this to read 'If you want to earn higher returns you are going to have to accept more volatility'.  Volatility is not necessarily risk.  I like to remind people that their real risk is not achieving their financial goals; having to work five years longer, having to scale back expectations in retirement, running out of money - those are the real risks that real people worry and care about.

3. If you want more stability you’re going to have to accept lower returns.  Agreed.  People have tried desperately to separate return from volatility - the whole industry of hedge funds was born from the promise of high returns with less volatility.  Except it's impossible, much like making gold from lead - a beautiful idea, but it just can't be done.  If you want the return (and we all NEED the return), you are going to have to ride out the volatility - hard to do by yourself, but much easier when you work with an advisor who guides you and educates you throughout the ride.

5. The stock market goes up and down.  Absolutely, but over the long-term it goes up about 75% of the time.  That gives us pretty good odds that today is a great day to invest.

8. There’s no such thing as a perfect portfolio, asset allocation or investment strategy.  There is only what is right for you.

9. No investor is right all the time.  And many are wrong most of the time!

10. No investment strategy can outperform at all times.  This is what makes it hard for people to stick with a strategy.

11. Almost any investor can outperform for a short period of time.  And this is the most dangerous thing that happens to individual investors - they think it's easy and equate their success with their genius.  

14. “I don’t know” is almost always the correct answer when someone asks you what’s going to happen in the markets.  Yes!  When I take on a new client I say 'there are some things I KNOW I will say to you over the next few decades, and one of them is I don't know'.  People will always want to know what happens next - that is something I can never know.  But I can get a really good idea of what ultimately will happen to people, and that's what matters.  

15. Watching your friends get rich makes it difficult to stick with a sound investment plan.  Oh so hard.  I bet you know someone who (claims) is making a fortune in a cryptocurrency right now?  It's hard to watch it and not risk your entire plan on the chance to 'hit it big'.  Don't do it. 

20. Proper diversification means always having to say you’re sorry about part of your portfolio.  This is a great one.  Diversification is your only free lunch when it comes to investing.  But it always mean you will hold something that is underperforming.  It's just how it is, and how it has to be.  See 36 for why.

23. There is no signal known to man that can consistently get you out right before the market falls and get you back in right before it rises again.  Oh how we wish there was.

25. Compound interest is amazing but it takes a really long time to work.  Think about it as the snowball effect.  It can take a decade or two to really start building.  You need to give yourself time.  Otherwise you might risk doing 15.

26. Investing based on what every billionaire hedge fund manager says is a great way to drive yourself insane.  This reminds me of a conversation I had with friends last night who told me that Kevin O'Leary (Canadian shark tank guy - I have heard him speak at a conference, he is an impressive speaker but not really an investment guy) is buying Bitcoin and should they also buy some?  Billionaires can invest millions in this sort of thing with no consequences if they lose it all.  You are not a billionaire, you can't.

28. Reasonable investment advice doesn’t really change all that much but most of the time people don’t want to hear reasonable investment advice.  This makes my job really hard sometimes!

30. Successful investing is more about behavior and temperament than IQ or education.  I say this all the time - the concepts are really simple, but our human nature makes it complicated.

31. Stock-picking is more fun but asset allocation will have more to do with your overall performance.  This is hard for people to understand.  They always think that their investment success is dictated by what stocks they own (it seems logical, right?).  But no, your investment success is 90% driven by what assets you invest in.  The actual stocks you own are far less important.  

34. The market doesn’t care how you feel about a stock or what price you paid for it.  Anchoring on a price is a really common investment behaviour - we tell ourselves 'I won't sell till it gets back up to the price I paid for it'.  It's totally irrational because the price you paid for it means nothing about what the stock is worth.  

36. Predicting the future is hard.  It's impossible over the short-term, but we can look back at what has historically happened and make some sensible and rational assumptions about the long-term based on probability.  That's why we have a plan, why we stay diversified and why people that work with a tough-loving but compassionate advisor tend to do better.  

Doing it alone right now, and want to talk through some of these points?  Drop me a line, I'd love to help you.