I think this new year came so fast that I not only got backed up on writing this commentary, but also, thankfully, did not seem to have time to make New Year’s resolutions or even any predictions about the market this year. This might actually be a good thing – why would I think that this year I’d be more likely to stick with a resolution than the past, ahem, 55 or so years (I doubt I made any in my first 10-ish years in this world). As far as predictions, while I like to make them, I still believe in the idea that predictions tell you more about the prognosticator than the future. Nonetheless, I might try to sneak one in at the end.
In keeping with the theme of aging from my last article, I thought I’d share today some thoughts on how lessons learned from life experiences can apply to how we can successfully navigate the investment arena. It’s interesting to me how I used to write about things like the beneficial math of dollar-cost averaging, how bond ladders lead to higher average fixed income returns, and the long-term compounding tax benefits of Roth IRA conversions. Now, with (quite)a few more investing years under my belt, my focus has shifted somewhat to more philosophical ideas. As I’ve heard it said, “life imitates art”; well, it seems to me like perhaps “investing imitates life”.
So here are some examples of how good approaches in life can carry over to investing:
1. Perils of Avoiding Discomfort. As I get older, I realize that I am not so much interested in “shiny things” – or even things in general but am more interested in being comfortable. Unfortunately, I realize that seeking comfort seems to make my world smaller. Actually, allowing myself to be in uncomfortable situations often brings me my greatest joys and my sense of truly being alive. A small example is that I recently started doing yoga in a community we’ve joined in Florida. With my “old and somewhat arthritic” body and being a total beginner, I have experienced some discomfort both physically and standing out a bit as a newbie. Yet, over time, I’m feeling better and have made some great friends. Thankfully, I didn’t choose to stay comfortably sedentary.
As I hope is somewhat obvious, seeking comfort in investing can actually come at a very high price. Most of us are not crazy about enduring the periodic declines in our portfolios, but realize they are temporary. Unfortunately, some would prefer the seeming comfort of money market funds and CDs that don’t have that downside volatility. However, the volatility of (diversified) investments tends to correlate with the long-term returns. Thus, those choosing the comfort of these “safer” investments end up paying a very high price in usually lower returns and possibly lower standard of living.
2. “If I always want what I have, I’ll always have what I want”. I put this in quotes because I heard someone else – not necessarily a famous person – say this. I’ve always felt fortunate and believe that having an “attitude of gratitude” simply makes life much richer and fuller. This simple switching around of the words really impacts me. What I have is so wonderful – family, friends, health, work family, … I could go on and on but remembering this quote helps me remember my many blessings while not focusing on wants for things I don’t have.
The applicability to investing is something that I’ve realized more recently – maybe I’m a slow learner. The way this is transferable to investing for me is that what is important is to focus on the components of my portfolio and their ability to help me achieve my important long-term financial goals. In this way, I’m not looking at what I don’t have. There will always be investments that out-perform my portfolio (and of course many that underperform). Currently Nvidia, with its ties to artificial intelligence, has been the meteoric performer du jour. Not too long ago, Bitcoin was the hottest thing around … before it collapsed. Focusing on all the top performers that I’ve missed (though I do own a small piece of Nvidia in a couple funds) while ignoring the bad ones that I’ve missed is a waste of time. I like my portfolio which has just enough discomfort to provide for my financial goals. That’s enough for me.
3. The futility of lane-changing on multi-lane highways during rush hour. Okay, I admit this one may seem like a bit of a stretch, but it is a lesson that I learned. About a decade ago, I lived in the city of Chicago for several months while doing the horrid reverse commute up to our office in Northfield. Thankfully, it is really the only time that I’ve had a long driving commute to work in my life. To be honest, it did not bring out the best in me. I would get frustrated and impatient. It always seemed like the lane that I was in was the slowest. And, of course, when I would switch to another lane it would quickly slow down and become the new slowest lane. The problem, of course, was one of expectations and impatience. I wanted to get to my goal (the office) faster than traffic would allow. I eventually realized this and slowed down and stopped my frantic lane changing. Amazingly, my slow lane wasn’t always the slowest anymore.
You can probably see where I’m going with this. Being impatient and switching from an underperforming investment into a top performer can actually be disastrous. It is basically a strategy of “sell low, buy high”. We have seen the results in various tables over the years of performance of investors lagging the very investments that they own. Rebalancing to plan-based target allocations takes this “investment lane changing” risk off the table.
Wrapping This Up with My Usual Prediction
Okay, I can’t resist and have to make a prediction. Here it is:
Those investors who patiently maintain the discipline to follow a well-thought-out financial plan, even when occasionally uncomfortable, will be in good shape to continue toward successfully achieving their most important financial goals!