Getting rich slowly is about rational investing over the long term with a focus on our goals
In our last blog we discussed the importance of having a plan.
Continuing on that theme a friend keeps a list of his goals in his wallet. His reason is that whenever he decides to impulse shop he is forced to look at his goals and it stops him from making irrational decisions.
With the volatility in the markets at the start of 2016 (2015, 2014 etc!) we take a look at investor behaviour and the importance of staying focused.
Timing the market
One of the greatest expressions I have heard is “timing the market”.
It is apparently a very easy concept according to some. All we have to do is work out when to take our money out of the market (i.e. when it is most expensive), and then hold the money in cash until the market drops to its lowest point when we re-invest. At that point the market goes back up and we make lots of money!!
The reality is that very few (if any) can consistently do this. To try is crazy!
However, we can be sucked into the hype and believe we can do this! For example, the markets collapsed in 2008 to a point where everything was very cheap. Buying in at this point almost guaranteed any investor a double digit return. As markets have corrected logically the returns cannot continue at this level but investors still believe they will.
Therefore, even though we are being told to expect returns of about 5% from equities a year (Barclays Report 2013) investors are still seeking double digit returns. To achieve this requires considerable risk and will often end in tears.
Growing rich slowly
If we go back to our plan and as part of that, we have assumed our investments will grow on average by 5% p.a. then this should always be our focus.
Assuming I put £100,000 in an investment for 10 years and go away to some remote island with no internet access for that time then during that period I will have no idea what the markets are doing. When I return, if my money is now worth £150,000 then I have achieved my 5% p.a. return.
The reality is that during that period the value could have dropped to £50,000 or it could have been £200,000 however because I was not following it I had no idea what it was doing.
In an age where we have access to instant information it draws us to making irrational decisions. When the markets crash we sell every ‘risk’ asset we have regardless of the loss. The challenge is that once we have done that we don’t know when to go back in. Equally to get the return we go back to chasing double digit returns which are unlikely to be there by the time we make the decision to go back into the market!
Getting rich slowly is about rational investing over the long term with a focus on our goals. Irrational investing is losing sight of the long term goals, panicking when the markets crash and then chasing short term double digit returns which are often poor investment decisions.
Missing the good years
To expand on this further The Boston Company ran a report showing $10,000 invested in the market for 20 years from 1 January 1995 to 31 December 2014. This takes into account all the peaks and troughs of the market. The annualised return would have 9.85% p.a.
By contrast if an investor took out money and went back in and missed just the best 10 days in that period the return would be 6.10% p.a., and if they missed 60 days it would be -3.84% p.a.
Staying the course
To conclude investing is not about gambling and trying to chase those double digit returns. Investing is about understanding our goals and staying focused.
This is about a journey and obviously there will be periods where it is difficult but what keeps us going through the difficult times is the focus on the end goal. Trying to duck out when times are bad and come back when good times return only compounds losses and makes the chances of reaching our target even harder.
As we enter 2016 and worry about our investments, consider the goals and avoid looking at the investments. Perhaps wait a year before we check the value of our investments, we might be pleasantly surprised!
Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.