From Ben Carlson at A Wealth of Common Sense: The obvious stuff is often the first casualty of the firehose of information, noise, opinions, predictions and analysis out there these days ... so I like to remind myself regularly of the following investment truths:
If you need to spend your money in a relatively short period of time, it doesn’t belong in the stock market. If you want to earn higher returns, you’re going to have to take more risk.
If you want more stability, you’re going to have to accept lower returns. Any investment strategy with high expected returns should come with the expectation of loss. The stock market goes up and down.
If you want to hedge against stock market risk, the easiest thing to do is hold more cash. Risk can change shape or form but it never really goes away. There’s no such thing as a perfect portfolio, asset allocation or investment strategy.
No investment strategy can outperform at all times. Size is the enemy of outperformance. “I don’t know” is almost always the correct answer when someone asks you what’s going to happen in the markets. If you invest in index funds, you cannot outperform the market. If you invest in active funds, there’s a high probability you will underperform index funds.
For buy and hold to truly work, you have to do both when markets are falling. Outperforming the market is hard (but not impossible). Most back tests work better on a spreadsheet than in the real world. Compound interest is amazing but it takes a really long time to work.
Predicting the future is hard. The best investment process is the one that fits your personality enough to allow you to see it through any market environment. It’s almost impossible to tell if you’re being disciplined or irrational by holding on when your strategy is underperforming.