Contradictions in investing

Now that the market has recently reached new highs, I wanted to talk about some things I’m starting to hear more and more clients mention.  I’m calling this ‘contradictions in investing’ as there are  things that we may think that we know, but by digging a little deeper we may find that those paradigms are incorrect.

Let’s start with “buy low, sell high.”  That ultimately IS the smart move, but the problem is the answer to this question: when is low/high?  While it seems right now is a top in the stock market, we in reality don’t know that.  In Benjamin Graham’s book The Intelligent Investor, written in 1949 by arguably the first value investor, he says “It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities.”  In a vacuum, sitting on cash and buying low makes sense, but we aren’t in a vacuum, and peaks and valleys do not come on a specific cycle.  Keeping your long term money invested and diversified and then rebalancing your portfolio to YOUR investment objective is superior to inaction in order to achieve long term financial success with your investable assets.

Speaking of investable assets, another word often brought up is performance (aka, rate of return).  Typical questions are “What is your investment performance?” and “I heard someone’s performance last year was 12%” and “What kind of performance should I have?”

Performance is very subjective.  To some, it’s their investment account performance vs. the S&P 500 or the Dow Jones Industrial Average.  This is fine if the account is comprised 100% of large-capitalization U.S. stocks.  If, however, anything else is in the account, then the comparison is no longer apples-to-apples.  To others, it’s their market value vs. their cost basis.  Regardless of what’s going on, they are happy as long as their account is worth more than where it started.  Someone from the first way of thinking may say “I was up 16% last year” and someone from the latter would respond “I’m up 20% from where I started.”  Those are two very different viewpoints, and neither is really speaking the other’s language.

In truth, performance is the return of the overall portfolio on a risk-adjusted basis.  What this means is, how did YOU perform overall based on your investment objective and time horizon?  Within a diversified portfolio, some assets will perform better than others over time, and realigning to your objective periodically will bring positives to the performance.

This brings us back around to the very start of this commentary, dealing with cash.  Cash IS part of a diversified portfolio, as is your real estate and other investments.  Looking at your overall allocation, not just what is in your investment/retirement account, tells the true story of how you should invest and how you are performing.  Your source(s) of income (both current and future), your ability to save, your lifestyle, and the legacy you would like to leave all tell more about your need for risk than just simply your age or the dollar amount of cash you have on hand.

If you have questions about your big picture and how that fits into your investment objective, I’d be happy to go over all of this with you.

%d bloggers like this: