Investment success requires self-discipline
As the stock market makes new highs and headlines, the pundits continue to debate which stocks will outperform. And how high could the stock market go? Or will a bear market wipe out all recent gains?
You’ll get wide disagreement among market professionals on these issues. Even worse, some people think the stock market is just a “game” to be won on a daily basis.
Stop. Please just stop. Take a look at “the market” itself. It has just made all-time highs. That means that anyone who just “owned the market” (as defined by the Standard and Poor’s 500 stock index) has made enormous profits over the past 50 years — a lifetime of investing.
It was just 50 years ago that the Dow Jones Industrial Average broke above 1,000. If you had contributed just $2,000 a year to an investment account, and earned the average return of the S&P 500 over those 50 years — roughly 10% with dividends reinvested — your account today would be worth more than $2.5 million.
Yes, 50 years ago index funds were not widely available to individual investors, and IRAs were not yet conceived. Still, that $2,000 a year investment works out to about $40 a week.
It wasn’t easy to stick to an investment plan during those 50 years that included the Vietnam War, double-digit inflation, a prime rate as high as 21% and several steep market declines. Yet here we are today with the stock market at all-time highs.
Having a good plan and sticking to it during emotional times is the key to longterm investment success.
In the mid-1980s, investment legend
Gary Brinson proved that asset allocation, not stock picking, is the most significant component of investment success. Extensions of this concept of constructing an appropriately diversified portfolio of assets won Nobel prizes for economists Eugene Fama, Harry Markowitz and others whose mathematical proofs defy description in this column.
However, their work lives on in money-management systems used by many financial advisory firms today. For example, Matson Money, a nationwide investment advisory firm created by Mark Matson 30 years ago, relies on a strict portfolio construction based on these principles. Margaret Wittkopp, president of Veritas Financial Services, a Wisconsin- and Florida-based advisory firm that is a member of the Matson group, explains the discipline required:
“Applying the academic principles to the portfolio is the easiest part, though complex,” she says. “Coaching the client to stay disciplined and avoid emotional decisions is the most crucial part. That’s what we spend most of our time doing. Making an emotional market decision is not like sneaking a piece of chocolate cake on your diet. In investing, one mistake can destroy a family’s financial future.” So do you have to understand complex market theory and statistical analysis, or use a fiduciary financial adviser to be successful at investing?
Not according to Michael Falk, a CFA, thought leader and author of “Let’s All Learn How to Fish … To Sustain Long-Term Economic Growth.” Falk has written a short paper, humbly titled: “Everything You Need to Know About Investing.” Unlike the words of Nobel economists, his explanations and charming graphics are easily grasped. (Find Falk’s entire article at TerrySavage.com.)