Part of the equation is the basic cognitive and behavioral quirks that we all have that serve to hurt returns. There was also a plug for taking a more holistic approach to life of which investing (or saving) should only be a small part. This last bit is interesting to me but the post didn't go very far in this direction.
The building block for the saver/investor issue is one we've discussed many times here. An adequate savings rate, going along for the market's ride, proper asset allocation and not doing anything stupid will get the job done for most people. Another point we've gone over is that not everyone is comfortable with normal stock market volatility. Anyone choosing an asset allocation with a less than normal exposure to stocks (maybe a range of 50-75%) should understand that something will have to give as a trade off for forgone growth opportunity. The simple answer is a higher savings rate.
Often when I post this sort of commentary someone will say that I am making the case for indexing and of course someone disposed to indexing will see it that way. Again though, I would call it a building block of understanding to start figuring the manner in which you will participate in markets. You may buy one index fund for stocks and one for bonds or you might spend your day scalping nickels on 2000 share trades but the starting point is the same. If you start as an indexer and become impatient then you will probably try to learn about alternatives. If you scalp nickels 20 times a day and do no better than market equaling returns then you might look for a strategy that gets a similar market-equaling result with less work, time and expense.
I look at this building block and conclude that the chart (I drew the chart on Paint, it is not real) above is my objective. It is a visual representation of what I have referred to as smoothing out the ride. If one can be successful with this approach then they are less likely to panic (avoiding the full brunt of large declines) and an unlucky (in terms of timing) emergency withdrawal should have less of an impact. For example someone having an emergency in March 2009 would do less long term damage taking out 15% if the portfolio was down 30% instead of 56% (the SPY bottomed out with about a 56% decline).
As far as balance in our lives such that investing is only a part of what we do, investing obviously has an element of problem solving embedded in the task. The need to problem solve is ongoing in investing. I believe that problem solving in things unrelated to investing enhances our ability to problem solve in things that are related to investing.
In the last three months our fire department has had three structure fires, one wildland fire, several medical calls and a search and recovery call. Setting aside that our department has never been that busy since I've been on board, each type of call requires situational awareness to interpret and process what is happening, know the capability of your resources, know what external resources are available, remember your training and of course perform the actual task required. Well that is a lot of problem solving and hopefully it helps with my day job.
6 comments:
I did an analysis of the last 9 years of returns. They have not been smooth imo. Up 55% was the largest and down 9% was the worst. Mid year was significantly worse than 9% at times as there was volatility.
For most of your clients smoothing the ride is likely a positive due to their poor emotional handling of losses. I use to have and still do have an extremely poor emotional response to losses. Hard to change who you are. I have chosen to let my analytical side to make all decisions and reading blogs like yours have likely made that over ride of my emotions possible.
I am up slightly over 1.2% compounded per month over the last nine years, which is over 15% per year. While not easy I suggest we all learn to live with more volatility.
This will likely be rather hard as I see the Feds money printing to end very badly with another bubble in assets. But first we will likely see new highs. At least I do not see any thing that can stop that from happening right now.
So let the good times roll and enjoy it for now.
SEG
I read the Pragmatic Capitalist's post, and I really don't see the point at all. PC doesn't define Saver or Investor or explain why one is better or worse than the other. They accuse people of boasting they are investors (like driving a Ferrari) because it sounds more impressive.
In any case, Pragmatic Capitalist links back to Zikomo Letter's post about savers vs. investors. Zikomo defines the terms (investors "purchase something that is not consumed today but is used in the future to create wealth." Savers invest in secondary markets like the S&P. But he also fails to explain why one is better than the other, or why this semantic distinction matters.
What should I do differently now that I know I'm a saver, and not an investor? (Other than perhaps introduce myself at parties differently, though I don't really introduce myself as an "investor" now anyways - sexy as that may sound.)
Matt, I don't know whether you should do anything differently but I think the point the linked post was that a lot of people take more risk than they should.
I thought the article would be of interest because reframing the issue as a distinction between saving and investing/trading cuts through the rather tired old debate about whether a particular strategy or tactic or instrument makes one an "investor" or a "trader."
From the perspective of a saver that is not a distinction that makes much difference: The correct question is what risk-adjusted total return is needed to reach a savings goal at a given savings rate and the sub-question then becomes what allocation and/or tactical regime will produce that yield at that risk level at that rate.
There are, needless to say, an extremely wide array of possible answers to that question and it may not clarify anything for some people but it does frame the problem more precisely: As Roger points out, a lot of folks take on more risk than they should but that may in part be because both investing and trading are typically spoken of in lump-sum terms and the notion of savings rate -- periodic additions to porfolio -- tends to fall out of the conversation.
Another way to say it is that, at a very high savings rate (or a lower accepted standard of living), a given saver might use nothing other than CD's and be perfectly satisfied. Not for everyone perhaps but ...
if not conveyed in my post, I thought PC's post was very worthwhile.
Thanks for the explanation guys. Last month I read about a study (CFA Institute) where they compared investing habits of finance professors with the general public, and found the general public were much less likely to invest in equities (than the clever finance prof's). So I guess the main risk to the "average investor" is that their capital will not appreciate fast enough to achieve their goals b/c of their lack of equity exposire. In which case, calling them "savers" won't do much to prod them out of their comfort zones into a balanced portfolio.
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