Investing self-discipline requires holding on to reasonable beliefs in spite of your changing moods. When your strategy suddenly seems unproductive, it is self-discipline that holds you on course and keeps you anchored.
Every investor, from time to time, has his or her emotions rise up when short-term events go against them. When your intellect and emotions sit down at the negotiating table, the intellect is usually the first to blink.
To combat this, SMI preaches the importance of developing a long-term mindset. For many, thinking long-term is easier said than done. Perhaps this perspective will help. The nearby chart shows the natural ebb and flow of any successful investing strategy. The long-term trend is up, but there are periods of rising and falling prices along the way.
As time passes, new investors come along and adopt the strategy. Some, solely by happenstance, invest at advantageous times (points 1-3). Others just happen to invest as an unfavorable period begins or is underway (points 4-6). Each group’s view of the reliability of the strategy is colored by the timing of their individual entry points. Some see it positively due to their initial profits, others view it with growing doubt due to their initial losses. None of this has anything to do with the validity or long-term success of the strategy itself.
Not over-reacting to short-term events is one of the greatest challenges facing the average investor. Make sure your expectations are geared to your long-term results (I suggest you use at least a 10-year time frame) rather than the inevitable short-term ups and downs. Based on the histories of SMI’s various strategies, here are some “reasonable expectations” you might adopt:
JtB should generate returns at least equal to those of the overall U.S. stock market on an average annualized basis over a 10-year period. Most recent 10 years (as found on back cover): Beat the market by 0.1% per year.
- Stock Upgrading
More often than not, this strategy will generate returns better than those of the U.S. stock market on a yearly basis, and outperform on an average annualized basis over a 10-year period. Most recent 10 years: Beat the market by 0.2% per year. (Underperformance in 2011 and 2014 has diminished what was once an impressive 10-year comparison for Upgrading; more on this next month.)
- Bond Upgrading
More often than not, this approach will generate returns better than those of the U.S. bond market on a yearly basis, and outperform over a 10-year period. Most recent 10 years: Beat the bond market by 2.7% per year.
- Dynamic Asset Allocation (DAA)
Yearly returns may not consistently be better than those of the overall U.S. stock market, but by minimizing losses during bear markets, DAA should generate returns better than those of the stock market over a 10-year period. Most recent 10 years: Beat market by 4.0% per year.
- Sector Rotation
By concentrating in single industries, SR likely will significantly outperform the U.S. stock market over a 10-year period, accepting higher risk of loss on an annual basis in the process. Last 10 years: Beat the market by 7.5% per year.
By blending three SMI strategies, 50-40-10 is likely to outperform the U.S. stock market over a 10-year period. This should occur with less volatility on an annual basis. Most recent 10 years: Beat the market by 3.4% per year.
- Optional Inflation Hedges
Designed for periods of rising inflationary concerns. Only in that environment would we expect this strategy to outperform the U.S. stock market in any given year. Most recent 10 years: Trailed the market by 1.2% per year.
- Enhanced Just-the-Basics
By adding an Upgrading element to our indexing strategy, EJtB should generate returns better than those of Just-the-Basics over a 10-year period. Most recent 10 years: Beat Just-the-Basics by 0.4% per year.
We’ve redesigned our back page so you can have updated performance information each month on all our basic and premium strategies. The point of doing that, however, is not to focus attention on the most recent month(s) as investors tend to do, but more importantly to help our members keep a long-term perspective by regularly updating the 10- and 15-year numbers.
Looking at past histories with records of success is a good defense against present discouragement leading to emotional — and generally counter-productive — decisions.