(Not So Easy) Secret Sauce to Investing in Up & Down Markets


So the market has been up and down all week. What is the secret sauce to investing in turbulent times? It's not what you think. 


The market has been a little bit crazy this week.

  1. We entered the week with a significant trade dispute with China that could be turning into a trade war.
  2. We saw an increase in interest rates from the Fed.
  3. We watched significant work in mergers and acquisitions where 21st Century Fox was acquired by AT&T.

And those are just the highlights! 

Today's conversation is all about how to feel confident when the market is choppy! I want to help you be a rock solid investor and here's a comforting secret neither of these two tips is complicated or confusing. Here. We. Go.

What can you do to be a successful, rock solid investor in times like this_.png

Do You Want to Become A Rock Solid Investor?

Solid, strong investing has way more to do with the behavior of the investor than it does with the investment methodology the actual investments you are in. 

I told this client who came in, when you work with us, we will spend an entire meeting discussing investment philosophy. But let me just tell you upfront, while investment philosophy is important, by far the most important piece of your success is actually YOU.

Some of you really need to hear this:

You believe the solution to all your problems is finding the right investment. Really the solution is changing your investing behavior.

Solid, long-term investing really is the tortoise and the hare. Slow and steady wins the race.

while investment philosophy is important, by far the most important piece of your success is actually you..png

So many of us meddle in our investments and ruin it. We might have been in something really good but we change it because of anxiety, or your fear of missing out, or because you just get bored. That behavioral change is what so often causes us to find ourselves coming up short over time in investing. 

This isn't just me saying this. I've seen this time and time again. There's a group called Kalbar. They do a study every single year seeking to figure out what is the impact of behavior on investment returns and the results have been staggering.

They have shown that while over a number of years if you had just invested in the S&P 500 you would have made double-digit returns over time, but the average American investor has made somewhere closer to 3 to 4 percent. WHY?

The reason for that is because most all of us when the market is up we tend to want to be in it, and when it's down we tend to want to be out of it. It can be totally destructive.

Let me tell you what I told this client. The real issue could be the way you are approaching this because I'm not primarily concerned with getting you half a percent higher than the next person down the street. I'm more concerned with you being consistent and actually winning over the next 10, 15, 25 years and that's more about your behavior than it is necessarily the investments you have. 

Here are two steps that I gave the person in our financial planning meeting and that I'm going to share with you. They are easy by themselves but not so easy to actually follow.


Step 1: pick a risk tolerance that you can actually handle. 

We talk about risk tolerance so much in our industry and so much of it is nonsense, because when you're sitting in my office and it's air-conditioned and you're drinking a nice hot cup of coffee, you're enjoying yourself and it's a stimulating discussion on investment philosophy. So as we're talking, I ask, "l how much risk can you handle?" and you might say, “Well you know. I don't mind the risk. I can handle risk pretty well."

The problem with risk tolerance in our industry is that we're not in foxholes when we talk about it..png

Because it doesn't feel very real, as we sit there chatting. But then when the markets tanking a few years later, you call me late at night freaking out because you can't sleep. Now, suddenly it really, really, really matters to you. 

The problem with the risk tolerance in our industry is that we're not in foxholes when we talk about it, so the only way to get to a real idea of risk is how have you handled risk in the past.

Have you been able to stick in the market when it's been dropping or not? There's actually not a good or a bad. This is just understanding your personality. 

The goal here is not that you mathematically have the most money possible. It's that you enjoy that process as well, because life is short. We don't need to live with stress every single day. So the first thing to figure out is what risk is right for you, and it's a blend of two things.

  • How much risk can your plan for the future afford to take in the market? 

  • How much risk what can you handle on a personal level?

The blend of those two tells you your risk factor so step one to being incredibly successful long term as an investor is understanding your risk. 

How many of you don't really know the right level of risk for you? Either because you’re putting your future at risk or because you can’t sleep at night, worrying about a drop?

Step 2: Stick with it.

Stick with your level of risk. Obsessively, unknowingly stick with it. 

Your job is to stick with your plan and the only way to stick with it is by doing two things:
 

One - rebalancing, constantly because it will get out of whack. 

It's like a seesaw.

The market is up then the equities the growth portion of your portfolio will rise faster than the fixed and you'll get out of balance. You’ve got to bring that portfolio back into balance by selling some of what's up and rebalancing the portfolio. I rebalance portfolios every single quarter like clockwork.

Come hell or high water, we've got to get back to the risk level that our plan and our mind can handle. 

 

two - you've got to stay in.

It's that simple.

But, it's that hard.

You got this.

Does Your Plan Beat Today's Market Instability?

I had a client come in about two weeks ago and they had been shopping around advisers. I told them, “You know, we have a lot of knowledge about investing and I'm kind of a nerd so I love digging into this, but I will never claim that you're going to get a better return here than the place down the street.” 

In fact, even if we have earned our clients a better return than other places consistently, I'm not going to sit and tell you the reason you should come invest with us is that we'll beat the competition and give you the best returns.

Honestly, and here's the scary part: getting you the most money possible is not my primary goal. 

It's not that I don't want to give you the best possible return. I care a lot about you getting a great return. My primary goal is not that you hit a grand slam this year but to see you hit consistent singles and doubles year after year after year.

Because if you look at 20 years of working with someone, it is far more impactful to raise your batting average than being at a place where you get the grand slam one year in and strikeouts every at-bat for the next four series.

Pardon the sports analogy here, but you get my point.

Stick with your level of risk. Obsessively, unknowingly stick with it..png

Some of you may not know how to determine the right level of risk and stick with it. You may say, “I don't know how to find the right risk level,” or  “I don't know how to stick with it.” And let me say, I would love to do that with you.

So much of my job is to be a financial coach. Yes, a big chunk is up front helping you find the right investments, but  it’s just as important is to be a friend and a colleague and a mentor, standing next to you when things are rough in the market. That's what we do. 

If you want that kind of coach and friend in the process, reach out to us. You can ask any question but you can also sign up for a free consultation with us.

We'll talk about your situation and see if we're a fit to help coach you through that and stick with you as you take that journey.

Now, you know the two steps. Go be an amazing, rock-solid investor and enjoy your life!