Those Who Persevere Are Rewarded

Over more than 40 years of providing investment counsel to corporations, endowments and individual investors, I’ve learned that one of the keys to successful investing is to avoid the tendency to “catastrophize” envisioning only the worst possible scenario.

It usually starts with a perfectly reasonable worry (like a slowing Chinese economy or dropping oil prices) and then, through incorrect assumptions, snowballs out of control. The way to avoid catastrophizing is to envision positive outcomes. To do that, it helps to know the history of market returns. Consider the following examples:

  • From 1973 through 1974, the S&P 500 Index lost a total of 37%. Over the next five years, it returned almost 15% per year. And over 25 years, it returned more than 17% per year.
  • From April 2000 through February 2003, the S&P 500 Index lost an even greater total more than 41%. Then, from March 2003 through October 2007, the index returned more than 100%, providing an annualized return of more than 16%.
  • From November 2007 through February 2009, the S&P 500 Index lost a still-greater total more than 46%. Then, from March 2009 through November 2015, the index returned 227%, or more than 19% per year.

Having knowledge of such good outcomes can help you avoid catastrophizing and stay disciplined. — By Larry Swedroe writing for Read the full article.

What doesn’t matter during a market sell-off

Charlie Munger once said, “I’ve heard Warren [Buffett] say a half a dozen times, ‘It’s not greed that drives the world, but envy.’”

There are thousands upon thousands of smart people out there offering their opinions and analysis. There’s something for everyone long-term investors, indexers, active investors, traders, economic data groupies and so forth. It can be very confusing for investors to know who to trust and who to follow because the temptation will always be there to listen to that pundit or portfolio manager who has been right lately.

What most people fail to realize is that it doesn’t really matter who nailed the latest market moves. What matters is whether or not something is relevant for your particular situation or time horizon.

There will always be a person, fund or strategy that is performing better than your portfolio. Someone else’s returns, predictions, time stamps or investment recommendations should have no bearing on how you invest unless you’re able to frame it in terms of your own unique situation and goals. Outperformance envy will not help your investment returns. Neither will someone else’s strategy if it’s not well-suited to your personality, risk profile and time horizon(s). — By Ben Carlson, writing for A Wealth of Common Sense. Read the full article.

Is the market smart or dumb?

Especially during downdrafts, many investors impute intelligence to the market and look to it to tell them what’s going on and what to do about it. This is one of the biggest mistakes you can make. As Ben Graham pointed out, the day-to-day market isn’t a fundamental analyst; it’s a barometer of investor sentiment. You just can’t take it too seriously. Market participants have limited insight into what’s really happening in terms of fundamentals, and any intelligence that could be behind their buys and sells is obscured by their emotional swings. It would be wrong to interpret the recent worldwide drop as meaning the market “knows” tough times lay ahead….

One of the most significant factors keeping investors from reaching appropriate conclusions is their tendency to assess the world with emotionalism rather than objectivity. Their failings take two primary forms: Selective perception and skewed interpretation. In other words, sometimes they take note of only positive events and ignore the negative ones, and sometimes the opposite is true. And sometimes they view events in a positive light, and sometimes it’s negative. But rarely are their perceptions and interpretations balanced and neutral. — By Howard Marks writing for Oaktree Capital. Read the full article.