How to be a more resilient investor
How to be a more resilient investor
You’ve heard us say it many times. When it comes to being a successful long-term investor, it is more important to be resilient than nimble. Most people become better investors once they realize that two pervasive approaches to the markets simply do not work well. One is trying to beat the market by overweighting the “best” securities, aka “picking stocks.” The other is trying to outmaneuver markets by getting in before a rise and out before a decline in value. The odds of either working over a meaningful length of time are low. In taxable accounts, the odds are even worse.
Prudent long-term investing is a fairly simple concept. Buy a broadly diversified array of securities and hold them. The longer the hold period the better.
Of course, simple is not always easy. Despite the spectacular record of success true investing has for producing results for people with realistic goals and expectations, it can be very challenging to stick with the approach under certain conditions. For instance, when the market is volatile, prices decline, there is a disturbing political event, or a personal matter arises, the added stress can test your patience and tempt you to abandon a diversified portfolio or fail to exercise the discipline required to get a good result.
We all want a stress-free life, and we all seek peace of mind. But life doesn’t work that way. We all find ourselves under some sort of strain from time to time. In such times, resilience is critical.
What is a resilient investor?
Psychologists define resilience as the process of adapting well in the face of adversity, trauma, tragedy, threats, or significant sources of stress. Thankfully, resilience can be learned. With intention, we can learn to manage stress and reduce its potential harm.
Football coach, Lou Holtz often says “pressure is something you feel when you are not prepared.” The first step in building resilience is preparation for stressful times. A big step toward good preparation is acknowledging some facts.
In the investment realm, this would mean accepting that markets should be volatile because, when working well, markets react to new information very rapidly. Since life presents a continual flow of new information and a series of unprecedented events, volatility is expected.
Why is being a resilient investor is important?
A quick look at the behavior of financial markets makes it crystal clear – volatility is a feature of markets, not a flaw. Markets have always been unpredictable and volatile, and we should never expect anything else.
A quick look at the behavior of financial markets makes it crystal clear – volatility is a feature of markets, not a flaw. Markets have always been unpredictable and volatile, and we should never expect anything else.
It is also true that corporations seek profits for their shareholders. That is what they are formed to do. There are plenty of examples of this profit motive turning to corporate greed, but in the aggregate, the profit motive creates wealth. The profit motive also makes markets resilient.
When times are tough, the quest for profits doesn’t stop. Corporations adapt to the new circumstances. Some changes work; others fail. Some companies suffer or fold while others thrive. The end result, however, is that no matter what was thrown at the economy, stock prices have always recovered.
As a result, successful investors accept these facts and expect market declines. The exact timing and severity of the decline is unpredictable, but that there will be significant declines many times over our lifespans is basically a sure thing. This expectation leads to a plan of action for when (not if) markets decline in value. The plan is what makes it easier to manage the stress of the decline because what to do is already known.
Next time you are on an airplane and there is turbulence, you won’t like it. Still, few people are truly shocked by turbulence because they know it is simply part of flying. Though they do not know for certain when exactly turbulence will start, how severe it will be or how long it will last, most passengers rarely fear for their lives or give up air travel. Their ability to handle turbulence stems from their expectations, experience, and confidence in the pilot.
Pilots are not fond of turbulence either, but they too do not fear it because they expect it and spend a lot of time training for how to handle it. They know what to do when a flight does not go smoothly, so they take the best course of action given the circumstances. As a result, flying in the U.S. is the safest form of long-distance travel. (Bureau of Transportation Statistics)
How can you be more resilient?
Psychologist Dr. Jerimya Fox of Banner Health offers some tips on building resilience. We list them below and overlay some investment items with his recommendations.
- Identify likely future challenges – It can help to see challenges coming because it makes preparation more effective. What challenges can we expect over our investing lifetime? Varying levels of inflation, changes to the tax code, disturbing political rhetoric, disagreeable legislation, war, natural disasters, economic shocks, fluctuating interest rates, sudden, sometimes severe stock market declines, and a media designed to provoke more than inform. These items are the turbulence no one can avoid.
- Shift your mindset – Dr. Fox says, “By having the right mindset, you can significantly impact your ability to deal with stress and hardships. Focus on the positives, look for the opportunities that challenges can create and focus on what you can control.” You have the ability to control your reaction to market declines, the news, and to maintain your discipline. Historically, declines have been opportunities to buy. When markets are down, future returns expectations are better.
- Lean on others – Talking with friends or family, not about markets but about what is going on in their lives, can remind us that the total balance of our accounts on any given day has minimal importance. A conversation with your cousin with cancer, or your 5-year-old grandchild graduating from kindergarten can make that clearer. Market declines are far from the end of the world.
- Draw on experience – It is easier to overcome adversity if you have overcome it in the past. All market declines have been temporary. If you panicked in the past, you saw the result and can show more resolve next time. If you didn’t panic, you know you can keep cool because you’ve done it before. Turbulence on one’s first flight is scarier than turbulence on the hundredth.
The importance of a good plan, well executed with discipline is evident. Planning and preparation can go a long way in overcoming whatever financial turmoil may come next. Just as having a good pilot makes turbulence less of an issue, having a team of well-trained, experienced professionals crafting and managing your plan can bring a great deal of comfort. And if you can learn to control your reactions to the news and social media messages you ingest, your chances of succeeding financially are much better.
Invest, don’t speculate. Always be diversified, patient and disciplined.
