Trust Services and SIMPLIFY
How to Be a Successful Investor Over a Lifetime
Occam’s razor is a principle and line of reasoning put forth by 14
century logician and Franciscan friar William of Ockham. It states that theories with the fewest assumptions are preferable. In other words, simpler is better. When it comes to investments, managers sometimes seem to add complexity in order to impress clients or justify excessive fees. Hedge funds are notorious for this.
In reality, the most successful individual investors over a lifetime often get there, not by hiring a genius market predictor or by getting market calls right, but by simply taking the time to
stick to an investment process.
While it can be hard to plan and stay the course over a lifetime, let’s take a look at why it is necessary and why it can be difficult to sustain.
Done properly and regularly, planning is probably the single most important contributor to your success as an investor and can help keep you from making irrational decisions. Knowing whether or not your dollars will stay invested for one or 20 years makes a substantial difference. In the short term, stock returns are largely driven by investor sentiment and collective emotions, which makes short-term investing similar to gambling or speculating. But in the long term, stock returns are driven by the price you pay and the growth rate. The chart below shows that the longer the time horizon, the more certainty there is when investing in stocks (the range of experienced returns is much narrower).
Sources: FactSet and Strategas/Ibbotson. Returns shown are based on monthly S&P 500 returns from 1926 to 2016. Index returns do not reflect the deduction of advisory fees, transaction charges, and other expenses. You cannot invest directly in an index. Past performance does not indicate future returns.
Sticking to an Investment Process
Having the patience to stick with an investment process can be extremely difficult over an extended period of time. Investors have to overcome several behavioral tendencies that can derail success.
Fear of Missing Out
Evidence of the fear of missing out is found regularly in studies of investor behavior. It tends to occur when market returns are strong, index funds and low-cost passive investment strategies perform well, and diversification appears to be a drag on returns. Because of this, investors are driven to chase performance, yet the fear of missing out is the reason why the average investor’s portfolio, as the graph below from BlackRock® indicates, has underperformed most asset classes. Investors tend to chase the thing that recently performed well, only to catch it as it falls, sell it, and move on to the next future falling star.
Sources: BlackRock; Bloomberg; Informa Investment Solutions; Dalbar. Past performance does not indicate future returns.
Fear of Loss
The fear of loss tends to occur during periods of market stress and can cause investors to fall short of hitting their financial goals. Studies find that investors consistently sell stocks when they are the cheapest and buy them when they are the most expensive. However, as the chart below shows, when stocks are the cheapest (quintile 1), they usually have their best 10-year performance immediately following. In contrast, when stocks are their most expensive (quintile 5) they barely outperform long-term inflation.
Sources: Robert Shiller and Bloomberg (1919-2013). Past performance does not indicate future returns.
Fear of Failure
Both of these fears feed into the fear of failure, which is when investors are afraid that their investment portfolios will fail to sustain the future cash flows they require. It’s true that there are no guarantees for investors regarding performance outcomes because the future is uncertain. However, we believe investors can overcome this fear by making wise process decisions along the way.
Successful investing requires staying the course during uncertain and uncomfortable times. It can feel unnatural to buy stocks that are relatively inexpensive while you observe more expensive investments continuing to accelerate. However, three principles drive our portfolio construction approach and direct our time-based planning process in all kinds of markets: appropriate diversification based on when the invested money is needed (risks are different over different time horizons); a disciplined focus on valuation; and leaning into areas of higher economic growth.
For clients who truly want to have clarity and confidence about their investments, we believe that a strong commitment to a wise investment process such as this is the greatest antidote to behavioral temptations. If you’d like to learn more about our investment process and philosophy, please contact a Ronald Blue Trust advisor by calling 800.987.2987 or emailing
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Disclaimer: Ronald Blue Trust obtains historical and other information from a wide variety of publicly available sources. The information and material provided is for informational purposes only and is intended to be educational in nature. We have taken reasonable care and precaution to ensure that the information is fair and accurate, or has been compiled from sources believed to be reliable. Nevertheless, we do not make any representations or warranty, express or implied, as to the accuracy, completeness, or fitness for any purpose or use of the information. The information may not in all cases be current and it is subject to continuous
change. Accordingly, you should not rely on any of the information as authoritative or a substitute for the exercise of your own skill and judgment in making any investment or other decision. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investments, accounting, tax, and legal matters or other matters before taking any action. We shall not be liable for any direct, indirect, or consequential loss arising from any use of or reliance on the information contained here. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Investing involves risk and the value of your investment will fluctuate over time and you may gain or lose money. Past performance of any security, sector or investment style is not necessarily indicative of future results.