Happy Holidays: Market Feelings Redux

In the November issue of the Coastwise Dividend Newsletter I summarized the feelings many investors experience during typical market cycles (and often take actions against their long term financial interests based on said feelings). While it has been empirically proven that those who attempt to trade in and out of stocks (aka time the market) materially underperform the overall market over time (versus those who proactively, in a disciplined, non-emotional way appropriately allocate asset classes to investment time horizons), there are still those who simply cannot help themselves. The vast majority of those are now in the suffering/regret phase and may soon be at the point of capitulation, selling their long-term holdings when they ‘can’t take it anymore’ regardless of when they actually need the money for other purposes.

The additional point I want to make in this newsletter is that a year or two from now (the average bear market lasts less than 18 months) when the dire headlines have faded and the world looks sunny again, those who felt anxious now but did nothing will feel thankful for their inaction. Those who sold at or near lows will feel shame and regret. Those who put more money to work through a regular investment plan and/or via dividend reinvestments will feel vindicated – and richer. Imagine how you would feel now if you had invested heavily in March 2009. Now recall how you felt at the time – like selling everything and throwing up.

You Are Not Dow Jones

Most investors are fixated on stock index averages like the Dow Jones 30 or the S&P 500. Their daily or even hourly moods are strongly influenced by the short-term movements of these indices, and they judge their own – or others’ – competence by performance relative to these benchmarks.

But these are just baskets of stocks picked by some committee you know nothing about. You are not Dow Jones. You are no smarter if your investment portfolio (which in most cases is well served to have asset classes not even found in the Dow like cash, bonds, commodities, etc.) performs better over some brief period, and no less intelligent if you underperform in any given week, month, or even year. The Dow doesn’t know who you are and it does not feel like it is in competition with you. Why do you feel compelled to compare your portfolio to it?

The Dow does not need to pay taxes. It does not need to ‘sleep at night’. It does not have bills to pay, or presents to buy, or debt to pay down, or a retirement to plan for, or an emergency surgery to spend money on, or a desire to give a little extra to the local charity this year because they were nice to your son or daughter. It has an investment time horizon of forever, whereas your financial needs range from needing to pay your rent/mortgage this month, to having known and unknown expenses a decade or two away. But you will never be 100% invested in stocks, whereas the index will always be 100% invested.

The index is just that: an index, or basket of stocks. You, on the other hand, are a person – and likely part of a family and/or community - with needs and wants, both present and future. For you, your portfolio is a means to an end – in fact hundreds of ever changing ends from the payment of daily expenses to education to travel to housing when you no longer work. The stock market has to take none of those things into consideration.

Thus during this holiday season when we are ending what many consider one of the worst years on record for investable assets largely speaking (2018 is turning out to be one of the few years when virtually no asset class performed well – not U.S. stocks, not international stocks, not commodities like oil, not bonds…), let us turn our attention to things that are important to us, that we have a level of control over, that we should be thankful for – and in general things that matter far more than beating an arbitrary list of stocks.

Some things that come to mind: be thankful for your physical, mental, and spiritual health (and focus on these). Be thankful for family. Be thankful for the beautiful surroundings you find yourself in. Focus (and make comparisons to) on staying well-diversified, to sticking with your long-term investment program, and to the extent you have near-term cash needs, to having those on hand (something we emphasize regularly here at Coastwise). Revisit the fact that regardless of near-term price swings, your companies are still profitable and sending you some of their positive cash flow every 90 days or so. Owning a well-diversified portfolio of dividend paying stocks is something you have both control over (versus broad market price swings) and more importantly what really matters over time given the importance of dividends in long-term returns. Instead of just asking if you beat an index, ask if your companies raised dividends and/or bought back stock? If you stayed within your budget? If you were nice to your neighbor, and treated your body well? Those are the important and meaningful questions to ask as they are the things that make up your life, not a basket of 30 stocks you can’t even name.

Beating an index doesn’t make you any smarter, healthier, or even happier. Having a well thought out investment plan and sticking to it – and allocating your precious time to your physical well-being, family, friends, work and the like – that will keep you on the path to health, prosperity and happiness in the new year and beyond.

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