Investing… A Game of Patience and Understanding
19 Jan 2015
When I first read this quote, I was put back with how simple it was. Yet, it was so very true. I have often said that investing by itself is not very difficult. It’s the “other stuff” that goes with it that complicates the issue. Like trying to invest long term in a very short term world. Also, expecting every investment in a portfolio, in the short term, to do well. Both of these observations are unrealistic and can cause you to repeat poor investment behaviors.
In 2008, when the S&P 500 suffered massive losses, almost every asset class went down. We learned very quickly the concept of correlation, or let me say lack of non-correlation. Dictionary.com defines non-correlation as “the degree to which two or more attributes (in this case, investments) show a tendency to vary together.” We want to be non-correlated in our investment portfolios.
A good example of what I am trying to say is let’s assume that you invest $100,000 in 10 $10,000 investments. At the end of the year (hypothetical case) you earn 8% on the whole portfolio. However, 2 of the 10 investments did poor. Since you were non-correlated (diversified) not all the accounts went down or moved in some direction. Actually, 80% of the portfolio did very well and 20% did not. Further, let’s assume your fair rate of return goal was 6%. Unfortunately, far too many people would spend all their focus on the 2 accounts that did poorly (in one year I might add) and lose sight of the bigger picture that you beat your goal of 6% per year by 33%! By definition, non-correlation means it’s OK to have investments move in different directions (some up, some down) in the short term.
Investors say they understand this, but the reality is we all want to hit the home run and have every investment do well all the time. This is again unrealistic and can create havoc for a long-term, well-diversified portfolio. So as another great philosopher once said, “Get out of the way of yourself…”
Jeffrey A. Johnston, ChFC
Investment Advisor Representative
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