Tag Archives: Long term investing

Your 401K Choices Are Important

By Larry Luxenberg  

Many times over the years I’ve looked at outside 401k plans for clients and others who have requested this. Often, they know these choices are important but they may not have a clue about how to make the choices or who to turn to.

In bigger companies, human resources professional offer advice about how to sign up or withdraw money but may not know much about how to pick investments either. The decision point often is when an employee is new to a company, has to deal with lots of paperwork and is nervous about adjusting to so many new things. Picking a 401k investment portfolio is way down the priority list.

That’s too bad because the choices of how much to invest and where to put the money are important, especially if you are young and stay on the job for a long time. I’ve also seen people who have held many jobs and accumulated a string of retirement plans and have no way or interest in developing a coherent investment strategy.

Many plans now are electronic only and obtaining relevant information from these websites or digital brochures can be frustrating. As a consequence, many people settle for making what they believe are common sense choices. Many plans offer target date funds and what could be simpler than determining your retirement date and signing up for that fund? Or they pick something else that sounds good: what could be wrong about a “balanced” fund. Failing that, how about picking 4 or 5 choices. That way, at least some of them may be good.

People who are actually using these accounts to invest and save for retirement, have a genuine long-term outlook (many decades) and aren’t using these accounts as expensive piggy banks (borrowing the max whenever possible) could be denying themselves a powerful investment tool.

For someone who is in their 20s or 30s and may not touch their retirement accounts for 30 or 40 years, their most precious investment resource is time. And by making a choice that is not thoughtful or downright wrong, they squander this valuable resource.

The daily ups and downs of the stock market matter little if one is putting away money for the distant future. If one properly constructs a diversified portfolio and leaves it in place for decades, the returns can be powerful.

In investing, as in much of life, there are no guarantees, Instead, we have to rely on the odds and weigh the potential risks and probable returns. In some cases, making reasonable changes to the investment mix and using assumptions based on long-term historical returns, returns of double or more over the decades are possible.

Before making the choices, we have to look at someone’s complete financial life, their hopes and dreams, the stability of their career and their tolerance for risk. Doing all of these things with the help of an experienced professional can make a big difference in someone’s financial life. It’s worth spending a little time on the choices rather than rushing through the burdensome paperwork.

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You Know You’re in a Bear Market When…..

By Larry Luxenberg  

You know you’re in a bear market when you are grateful that the Dow Jones Industrial Average is only down 300 points. You were afraid it would be down 600 or 1,000 points so 300 doesn’t seem that bad.

You are grateful that one or two days a week, like clockwork, the stock market gives you a break and goes up.

Another sign of a bear market is when the pundits who are predicting the end of civilized society as we know it sound more sane than the ones who predict that at some point the stock market will only go down a little bit.

It’s a bear market when you are tempted to buy something and you say, Nah, it can wait a few months.

You’ve given up all hope of anything good happening ever again.

You aren’t afraid to sell something because you know it will go down further but you won’t buy anything because, what’s the point?

Keep in mind, now that we’ve established that we are in a bear market, both bear and bull markets seem to last longer than we ever thought possible and go further than seems reasonable. But it’s always darkest before the dawn.

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A Reasonable Request?

By Larry Luxenberg  

Last week a client told me that he believed a recession was imminent and he wanted to take investment actions capitalizing on that view.

At first blush, this seems to be a reasonable request. Many commentators foresee a recession as the result of the Federal Reserve’s aggressive interest rate tightening cycle.

However, this view reflects several beliefs about investing that are simply not true. One of the main suppositions is that the stock market acts in line with what is happening now. In fact, the stock market tends to take a collective view of the economy 6 to 12 months ahead and discount those future events.

In the case of this expected recession, if it’s visible now, stock market action should have discounted it last year.

Even more difficult is the idea that anyone can predict a recession ahead of time. To get an idea of how difficult it is to predict a recession consider this. Officially, recessions are designated by a group of nationally prominent economists at the National Bureau of Economic Research. One of the main indicators of a recession is two consecutive quarters of decline in Gross National Product. However, the economists look at many indicators of economic activity in determining when a recession began and when it ended.

But what’s most telling about this group of distinguished economists is that they determine the dates of a recession several years after the recession has ended and the subsequent recovery is well under way. In essence they struggle to call the recession afterwards and don’t even attempt to predict it ahead of time.

So what my client wants to do is something no economist would hazard and after he accomplishes this feat he then has to backtrack as much as a year to capitalize.

If you ask for the impossible, often you will be disappointed.

Instead, it makes more investment sense to take into account the regular occurrence of recessions and bear markets when you put together your investment portfolio. Being able to ride out these downturns without shifting positions has produced powerful long-term returns.

Over the last century, investors in the largest American companies (measured by the Dow Jones Industrial Average and the S&P 500) have doubled their returns on average every seven years. This doesn’t occur like clockwork but the longer you give it the closer you’ve gotten to these results.

When I began my investment career in 1982, the Dow hovered around 800 as it emerged from a two year double recession. Today, after a terrible period for the stock market, the Dow is almost 33,000.

That’s a great period for investors who shunned predictions and stuck with the market through thick and thin. Trying to save yourself some short-term pain is just as likely to sabotage your long-term performance as it is to help.

If there was a way to avoid the pain, I would be among the first to sign up. Instead, I do the next best thing. Put together a diversified portfolio that’s designed to prosper despite market swings and keep my investments intact as best I can.

No one knows whether this approach will work in the future but it makes more sense than trying to find a better crystal ball.

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Babe Ruth and Financial Planning

By Larry Luxenberg  

Babe Ruth was born into a poor family in Baltimore and died young as a wealthy man and the hero of the golden age of sports. Although he didn’t look like a heroic athletic and roamed well outside of fair territory, he broke ground in athletic and business achievement. He had good coaching and support in both arenas and knew which rules to break (most) and when to listen to his coaches and he had some of the best.

Ruth’s life is swathed in myths and we will never know the full story. But what facts we know and the many myths are instructive. Ruth was a great athlete and dramatically changed the game of baseball – then the national pastime – forever. And despite his great hunger and appetites, he achieved success on and off the field, making up in part for the deprivations of his youth.

At age 7 he was a wild youth and his parents shipped him to reform school at St. Mary’s Industrial School in Baltimore. He remained there till the end of his teenage years and the beginning of his life as a professional baseball player. Life at the school was regimented and austere; he only got meat once a week and had to learn a trade and work. He became a proficient shirt-maker and carpenter. At the school he also became a great baseball player under the tutelage of Brother Matthias.

At 19 he signed a contract with the Baltimore Orioles, then a minor league team. Soon they sent him off to the Boston Red Sox in 1914. It was not love at first sight and he spent part of that truncated season in the minor leagues, helping the Providence Grays win a minor league pennant.

Back in the majors the next season he began to establish himself as the best left-handed pitcher in the American League and a strong hitter. Short of cash, the Red Sox sold Ruth to the New York Yankees in 1920 after three World Series Championships. At that time, the Red Sox had won five of the 16 World Series and the Yankees had yet to win their first American League pennant. He went on to lead the Yankees to four World Series Championships and create an aura of success there.

Ruth was already the best home run hitter in baseball and 1920 ended the “dead ball” era. The livelier ball and some other changes opened up the game and with Ruth in the daily lineup, he led the charge,

In 1923 the Yankees opened up Yankee Stadium, “the House that Ruth built.” He was the biggest draw in the major leagues at home and on the road. He soon broke records for player salary as well as for batting and pitching. Prior to Ruth, Ty Cobb’s salary of $25,000 was the highest in baseball history. This at a time when $10 or $20 a week was respectable if not great pay. At his peak, in 1930, Ruth earned $80,000 a year, more than President Hoover. Asked about that, Ruth said, he’d had a better year than Hoover and that was demonstrably true. For 14 straight years, Ruth was the highest paid player in baseball with no one close, another record that has never been equaled or approached.

While Ruth made a lot of money, in the early years of his career, he kept little or none of it. He was generous and lived high and partied wherever he went. He bought cars as fast as he wrecked them and the beer in his hotel rooms was always cold and plentiful. His appetite for food and many vices was brobdingnagian. In addition to major league baseball, he made money barnstorming with Lou Gehrig around the country, appearing on the Vaudeville circuit, in the movies and making endorsements.

In 1927 his fortunes changed dramatically for the better. That year the Yankees fielded one of the great all-time teams with Ruth in the middle of a lineup termed “Murderer’s Row.” He also became the first baseball player to earn as much or more off the field as on it in the regular season. That year he also turned most of his financial affairs over to Cristy Walsh, the first real baseball agent. Walsh was a promoter, public relations man, business manager, investment manager and all-around trusted adviser. It isn’t clear, how Walsh first established the relationship. But the story I like best happened when Ruth was living in the Ansonia, a famous apartment building on Broadway in the Upper West side of Manhattan. Walsh described hearing that a local deli was going to be delivering a shipment of beer to Ruth’s apartment and Walsh bribed the deliveryman to let him bring up the beer. Once there, Walsh got Ruth to agree to let him represent him.

No one now knows the true story of the beginnings of the relationship but we do know that Walsh had a talent for ingratiating himself with successful people and in turn did well by them. Over the next few years Walsh expanded his relationship with Ruth until he took over most of his business affairs and kept that up until 1938, three years after Ruth had retired from baseball.

In 1927 Ruth had run out of money as a result of high living, record fines and suspensions and an inability to keep money in his pocket. Walsh loaned Ruth money and in turn had Ruth turn over much of his incoming funds to Walsh. That year Walsh set up a trust for Ruth at the Bank of Manhattan and had Ruth put all of his non-baseball earnings into the trust. By the early 1930s, the trust grew to over $200,000.

Despite the stock market euphoria, the bank invested the trust conservatively with seventy percent in bonds and thirty percent in dividend paying stocks. Even at the peak of the stock market in 1929, bond interest rates and stock dividend yields were attractive by today’s standards. Government bonds yielded close to 3 percent as did Blue Chip stocks while corporate bonds yielded 5 percent. During the worst years of the Depression, while economic activity plunged and unemployment soared, Ruth’s trust continued to have positive returns.

Eventually the bank returned almost half a million dollars in principal and earnings to Ruth. Left in his own hands, the money surely would have vanished with hardly a trace. At that time and for decades later, ball players usually ended their careers with little or no money left and having to enter new careers to support themselves.

Ruth was able to enter retirement having played in the first two All Start games and as a charter member of the new Baseball Hall of Fame with no concerns about money. Ruth could spend his time golfing and fishing with no money worries although he continued to earn money from endorsements and appearances for the rest of his life. He died at age 53 of cancer, having been one of the pioneers of chemotherapy and as a result having a short remission of his cancer.

In an age of heroic sports heroes and supportive sports writers, Ruth’s star shined the brightest. And through his fortuitous relationship with the pioneering agent Cristy Walsh, Ruth was also successful for himself and in breaking barriers for other players. Ruth often lived to excess and not all of his life was admirable but despite his humble roots he starred on the grandest stages and brightened the lives of many people around the world.

Much of the information for this story comes from The Big Fella by Jane Leavy, the Wikipedia article on Ruth and other stories available on the Internet about Ruth and books and stories on the financial conditions before and after the stock market crash of 1929.

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Bobby Bonilla Day, Anna Scheiber and the Miracle of Compound Interest

By Larry Luxenberg  

Every July 1, the New York Mets mail out a check for $1.2 million to former outfielder Bobby Bonilla This will continue until 2035 even though he last played baseball in 2001.

Anna Scheiber died in 1995 at age 101 and left a fortune in excess of $22 million even though she never earned a salary of more than $4,000 and had a pension of $3,100 a year.

Both stories dramatize the miracle of compound interest.With both we are talking about piles of money beyond the reckoning or aspirations of most people. But they do provide lessons that are applicable to all of us. Spend wisely, save for the future, invest globally and be patient.

One example I’ve often given is that for the price of a car, a parent can provide for a child’s retirement.

Here’s how that works. For the last 95 years, for as far back as we have good statistics, the broad U.S. stock market has returned about 10 percent a year. There’s no guarantee with stocks. No guarantee whatsoever that that will continue. But for almost the last century, that is what has happened to a broad investment in U.S. stocks.

At that level — 10 percent a year — stocks double every seven years and quadruple every 14 years. Play that out for fifty years. If you fund a child’s Roth IRA account at age 20 with $5,000, assuming they have that much earned income, and they don’t touch the money till retirement, the money won’t be taxed again under current tax law. If you invest that money in stocks for fifty years and you achieve those same returns — admittedly a big if — you will have accumulated $587,000.

If you do that four times, the total would be in excess of $2.3 million. There would be inflation to reduce the value of that sum and the child would have to sit by and do nothing — not touch this massive nest egg and not panic at all during the intervening market crashes. Patience is key because most of the accumulation is in the final years. But if they can surmount all these challenges and past is prologue, that child would be a happy person in retirement.

None of this is easy but some semblance of it is attainable. Whether you accumulate vast riches or merely add a bit to a more modest bundle, let compound interest work for you.

Bobby Bonilla was a great baseball player. Early in his career, for three years in the early 1990s, he was the highest paid player in the league. He was a star on one World Series championship, for the Florida Marlins.

But other, higher paid players, didn’t manage to postpone the payoff and guarantee their financial security for most of their adult life.It’s hard to be patient but a great slugger has to wait for the right pitch and that’s what Bobby Bonilla did.

The annual checks to Bonilla were not a massive stroke of idiocy by the Mets. Instead, it was a careful calculation by both sides of the value of compound interest and the benefits to each.

Financial writers have calculated that the string of payments assumed an eight percent return on the money that the Mets owed Bonilla. They were supposed to pay him $5.9 million in 2001. If that sum were invested at 8 percent interest and the string of payments were deferred for ten years, this series of checks is what you’d get.

A return of eight percent was good for both sides. Bonilla didn’t have to worry about bad investments or being tempted to spend his money too soon. The Mets didn’t have to pay out the money right away and had the potential to get higher returns on the money or use it in the meantime for other purposes.

Anna Scheiber is a different story entirely. She never made much money but she never spent foolishly either. She lived simply, saved her money and invested it. The heroic part was how much of her income she saved and invested and resisted temptation for so long. The investments were good but not out of the normal. Financial writers have calculated that she earned a rate of return a little better that the broad U.S. stock market but not much better. If she earned exactly the same as the market, the story would be basically the same.

We don’t know most of Anna’s story directly and we can’t calculate the returns exactly. We don’t know when she began saving and investing and she may have had some minor sources of income such as gifts or inheritance that we aren’t aware of. But contemporaneous interviews with her longtime lawyer and stock broker give the broad outlines of her story.

Anna worked as an IRS auditor and never got promoted to a high level despite good reviews of her work. She began saving and investing before she retired and a tax return while she was working showed enough dividends to suggest that her savings in 1936 could have been $21,000.

She retired in 1944, apparently never working again and lived till 1995. Her investment strategy was to buy Blue Chip stocks and hold for the long term. She studied the stock market and was patient and apparently avoided the key mistakes that most investors make, letting their fears psyche them out of large returns.

Both stories converged in 2008. Anna donated her large legacy to Yeshiva University for scholarships for women.Yeshiva University and the New York Mets both turned for investment expertise to Bernie Madoff, the convicted swindler. Eventually both recovered much but not all of the money.

Today is Bobby Bonilla Day. It is a great time to remember not only his baseball talent but his patience and financial acumen and to celebrate the discipline and sagacity that secured the fortunes of both Bobby Bonilla and Anna Scheiber and apply those lessons to our every day lives — spend wisely, invest globally and be patient.

 

 

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The Era of Magical Thinking

By Larry Luxenberg  

In recent years we have been conditioned to believe that anything is possible. Indeed, miracles have happened. The Internet, cell phones, social media, networked computers, online shopping have changed the world beyond recognition. These advances have changed so much and become so ubiquitous that we take them for granted. But perhaps because of these big changes, we expect miracles everywhere.

Cheaper, faster, easier is the rallying cry of technology and much of the time it delivers. But not always. Usually we have to compromise on some of these things. Easier for example. These days, it seems, everything beyond a pencil comes with a thick user manual and the use is not self-evident.

I’ve been particularly struck by television advertising. Many service businesses advertise better, cheaper, easier and more personalized. Usually, some of these claims, but not all, may be true.

One real estate company advertises that if you answer a few simple questions, it can give you a personalized quote on your house and arrange a transaction. Now, they may be able to do something if you answer a few simple questions, but they certainly can’t give you a personalized recommendation based on a handful of answers.

A brokerage firm boasts that they can make investing easy. And, indeed, they have. But they have hoodwinked a generation of naïve investors, convincing them that ease of use equates to success. If your goal is to easily do transactions, that’s fine. But if your goal is to save and invest and build wealth, ease of transactions is irrelevant at best and likely counter-productive. Flushing money down the toilet is easy too but unlikely to be a recipe for amassing wealth.

Google is one of these miracles. A majority of people around the world can no longer get through a single day without Google. It has unlocked more information for more people than perhaps any development in history. And, yet, even Google is no guarantee that our questions will lead to good answers. If the question is simple, we will get the information we need in seconds. But for more complex questions, we often do not get satisfactory answers. More importantly, often times, we do not know the right questions to ask and Google cannot supply answers if we don’t know the questions.

For the right questions, I turn to experts. When I go to a good doctor or lawyer, often I find that the question I arrived with was not the important one, the one that I should have been asking. An expert can frame the important questions, and with that help, often, we can supply the right answer. I have become sophisticated about medicine the hard way and yet I’ve been struck by how many times I haven’t had a clue about the most important ways of treating my conditions. Perhaps the years of study and work in the field — expertise-– do matter.

In my field of personal finance and investing, I find that rarely do people address the important or critical questions or bring perspective to their situation. Oftentimes they’ll ask how to do something when the more important questions are why or what, when and where, which need to precede how.

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Can the Market Survive Speculative Fervor?

By Larry Luxenberg  

For months, the global markets have been rife with speculative excesses. Normally, this would be a worrisome development for any serious investor. Often, speculation dooms bull markets. But so many factors auger well for the markets that it’s hard to call the end of this bull.

So far, instead of the bell tolling for the bull, we have seen a rotation away from many – but far from all –of the areas where speculation seemed extreme. At the same time, over the last six months, we’ve seen unloved sectors quietly assume new prominence.

The critical question – and the answer is unknowable – is whether the rotation can continue, mute the most extreme speculation and save the bull or whether the speculation is just too extreme to manage without dooming the whole enterprise.

For a grizzled market veteran, it’s easy to spot troubling trends. But you never know how far these trends will go and how the excesses will get resolved. Sometimes speculation ends in a fiery ball of destruction. Other times, the speculation works out over time with the pull and tug of the market creating drama but leaving an asset price essentially unchanged for a prolonged period.

One prominent example is the U.S. stock market in the Go Go 60s. A two-decade bull market peaked in 1966. The Dow Jones Industrial Average closed at 995 on Feb. 9, 1966. The market swung dramatically for 16 years but didn’t finally bust through that level until August, 1982.

Gold topped 800 in 1980. It didn’t breach that level again until 2007 — twenty-seven years later. In 1980, an ounce of gold and the Dow Jones Industrial Average were both at 800. Today gold is above 1,800 and the Dow is over 34,000.  There have been lots of ups and downs in the meantime for both markets and occasional turns in the spotlight but for the most part these moves have been quiet.

Where are possible areas of concern today? Candidates include the cryptocurrency markets, residential real estate, blank check companies (SPACs), initial public offerings, companies with humorous business models, the fixed income markets.

On this later point, a few months ago Greece issued 30-year bonds at a yield of under 2 percent. A decade ago, Greek 10-year bonds were yielding close to 40 percent.

In April 2015, Mexico sold 100-year bonds at an interest rate of just over 4 percent. Who has the foggiest idea of life 100 years from now? The saving grace is that the institutional investors who bought these bonds, if they don’t work out, are unlikely to be witness to their own folly.

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Know-It-Alls

By Larry Luxenberg  

Beginning investors think they know more than they do. Experienced professionals accept uncertainty and are secure in the knowledge that they cannot predict the future.

It is not a harmless affectation to think that you can know the future. It is one of the costliest mistakes an investor can make. Only luck can save an investor who is overly confident in his foresight.

Often, investors spot a trend and think they can make money at it. They think they alone, among millions of investors globally, who spot this particular trend and have the sagacity to capitalize on it. Most dangerous are those who get lucky early in their investing efforts and conclude that they are investment geniuses.

Some investment geniuses exist and I’ve known several. But investment geniuses are much rarer than the number of people who claim that rank. A wise investor I know, compared investing in stocks to mining low grade ore. Picking up a little ore efficiently can make you money if you are patient and work hard. You won’t get rich quickly but over time, the rewards add up.

A common investment mistake is believing that the investment world is static when in fact it is highly dynamic. By way of illustration, consider a trend like the widespread legalization of marijuana. Without doubt, the industry will grow. More marijuana will be consumed, marijuana businesses will add many employees and revenues may skyrocket.

This trend may help investors but it does not guarantee that investors will profit. At the start, there may be no public companies in the industry. Small private companies may dominate. Over time, some of these companies may go public and grow large enough for investors to buy shares.

But if the industry grows fast, soon dozens and perhaps hundreds of companies will spring up to compete for the business. Each company will issue shares and some companies may issue shares repeatedly. As the number of shares of stock in the industry rises, the higher profits are divided among more and more shares. Shares often grow faster than profits. Even if the industry grows faster than the investor anticipates, the investor’s share price may not rise and he could even lose money.

Some version of this sequence has happened many times. In the late 19th century, there was only one automobile company, according to Wikipedia. At the peak, there were 1900 automobile companies. That number plummeted during the Great Depression and by the 1950s, the Big Three dominated U.S. production. Not all the early companies were flops. Some were acquired and their investors made money but many companies became worthless. This is a great example of a big and successful trend. At the start, only a handful of cars were produced. Eventually 17 million or more were sold annually. While the industry had nearly a century of growth, over much of that time, investors were left in the cold.

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The Law of the Jungle

By Larry Luxenberg  

The way humans have evolved over millions of years is spectacularly unsuited for investing (Think Ramapithecus and similar forebears). The events and the results of the last year demonstrate that as well as anything could.

In most environments, survival is based on quickly recognizing threats and reacting. In the stock market, the best results come from putting some thought into investments ahead of time and then ignoring threats and being patient.

In mid-March last year, in the early stages of the pandemic, the stock market had a historic two-week swoon. In that period, the stock market had three of the 20 biggest single day drops in the more than 100 years of modern stock market history.

A global disease closed economies around the world with unprecedented speed and thoroughness. In time, the pandemic turned out to be much worse in many ways than most experts predicted. Still, the economy, while not fully back, has recovered more quickly than most forecasters anticipated.

Any prudent investor could be excused for taking money off the table last spring and sitting on the sidelines until the devastation was behind us.

And that was the exact wrong thing to do.

Looking back over the last year, we have had a historic stock market rally with stocks increasing more than 60 percent in the U.S. to all-time record levels.

Within the market, we have had an equally dramatic turn of events.

As the pandemic raged, giant technology stocks, which benefited from the economic activity of shut-ins, soared. A huge percentage of the gains from spring to early fall were concentrated in a handful of stocks such as Apple, Facebook, Microsoft, Google, Netflix and Amazon. Tesla became the most valuable automobile stock in history.

And then quietly, it all changed in undramatic fashion. The big tech stocks continued to drift upwards but stocks that had under performed for a decade, the small cap value stocks, the energy stocks, real estate stocks, cruise ships and airlines surged.

These unloved, even hated stocks had one of their half dozen biggest periods of out performance in the last century and for the full year dramatically outperformed the tech darlings.

In the spring of 2020, any investor who was paying attention was ready to panic. There was no plausible explanation for sticking with the program. No story made sense. In practice, on March 23, 2020, the Federal Reserve launched the most aggressive rescue program in modern history and it worked beyond anyone’s expectations. In a shocking display of unity, the Congress passed dramatic legislation that also played a key part in reviving the economy. Into 2021, the Fed and Congress continue to do their parts to keep the economy climbing.

Despite this volatile period that no market analyst could possibly have predicted, individual investors faith in their ability to foresee stock market gloom is still undiminished. People who badly misread the landscape a year ago to their own detriment, are convinced that they see the pratfalls ahead. Surely after the stock market has risen so far so fast, it cannot keep going.

Of course, no one knows. That is the big lesson of the last year. No one knows and anyone who thinks differently is an ill-informed fool.

What we do know is that over time, if the economy does well, the broad stock market should too. Over the last 95 years, since good data became available in 1926, the broad U.S. stock market, as measured by the Dow Jones Industrial Average and the S&P 500 have increased by 10 percent a year on average. Rarely has the market gone up close to 10 percent in a year but most years it has produced positive returns and only a quarter of the time has it produced significantly negative returns.

At a 10 percent annual return, the market doubles every seven years and quadruples in 14. My stock market career began in the summer of 1982 when the Dow was at 800. Today it is above 33,000. There has never been a time in those nearly 40 years when I could not have made a case that the stock market faced significant challenges and it was prudent to be wary. And yet, the prudent thing actually was to stay invested.

If you stay invested through thick and thin, you are highly likely to be the beneficiary of powerful returns. If you go in and out of the market, your returns are likely to suffer greatly. Big gains on a handful of days power portfolios and these rare big days are impossible to foresee.  The effect has been well documented.

For several decades consulting firm Dalbar has looked at investor returns compared to the performance of the mutual funds they invest in. Generally, investors get 1/3 to ½ of the returns their mutual funds generate because they move in and out at the wrong times.

In 1996, Fed Chairman Alan Greenspan made his historic warning that the market had risen too much because of “irrational exuberance.” At the time, the Dow was at 6437.

Surely, after a period of big increases the stock market is bound to cool off. After a spell of hot temperatures, we often have a cold wave.

However, every day logic does not factor into the stock market.

Stock market researchers have crunched the numbers. After periods of strong stock market returns, the stock market has produced average returns. After periods of weak stock market returns, the market has produced average returns. After periods of average returns, a similar result.

The lesson? Don’t guess. Don’t expect that your common sense will work on the stock market. Don’t expect that you are smarter or better informed than the millions of other people focused on the stock market and paid to do so.

What should you do? Understand your situation. Figure out how much risk of a difficult period can you sustain. Understand why you are investing and when you will be spending the money. Craft a diversified portfolio. Keep your plan flexible. Above all, don’t react to events and be patient. Don’t let your adrenalin and emotions guide your investments. Understand that investing is a long game and short- term movements are noise.

Over the long term, over decades, the stock market has the potential to be rewarding if you can keep your own behaviors in check. The stock market is inherently risky but the biggest risk is you, not the market. Here is the true law of the jungle for investors. Stick in the market and hear your returns roar.

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Fat Tail Years

By Larry Luxenberg  

A fat tail in investing doesn’t describe an animal. It’s a statistic that indicates a rare but often important outcome. In investing it may mean the odds of a really good or really bad outcome.

Stock market investors are afraid of lots of things but they really should fear four things. One: The stock market has a terrible year. Two: After that terrible year, the stock market doesn’t recover for a long time. Third: The investor is out of the market when it goes up. Finally: they hit on one of the many ways to mess up their investments.

Looking at the last 95 years of stock market returns, the odds of number one and two are low — not zero — but low. In that time, the broad market has declined by more than 20 percent in only six years and by 10 to 20 percent an additional eight times. In 10 more years the returns have been slightly negative; disappointing years but not something to fear.

The rest of the time — 71 years/75 percent of the time — the broad stock market as measured by the CRSP database  has had positive returns and 58 percent of the years, those returns have been greater than 10 percent.

A 10 percent return is the long-term average for the last century and it’s a powerful return because at that rate portfolios double every seven years.

The overall message is that the odds of you messing up by overthinking the problem and doing something creative is one of the biggest risks. The odds of the stock market having a really terrible year and taking a long time to recover are low. And one risk you can control is the chance of the stock market having a good to great year and you not being involved. 

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