Hi Reader,
Investing in the markets – ANY markets – can be a roller coaster. Investing in real estate can be a roller coaster. Investing in Beanie Babies could be the biggest ride of your life.
This seems somewhat obvious when it comes to stocks, as most of us can easily identify the highest highs and the lowest lows we’ve either experienced personally or been made aware of via the ether of the universe. Ever seen one of those “If You’d Invested $10,000 in Amazon in 2000” headlines? They’re usually accompanied by a chart like this:
Yes, if you’d invested $10k in AMZN on January 1st, 2000, and rode it regardless of the highs and lows, it would be worth $334,000 today. But it also would have been worth north of $450,000 a couple of years ago. Would you have sold it then? Would you have held on because it had always proven to be a winner before then? Or would you have sold it once that investment dipped below $300,000 last year, for fear of losing it all? Because the opposite can always happen, and sometimes to companies universally beloved and proven to be winners.
For whatever reason (probably geography) I have a number of clients who own shares of AT&T. Some of them for a very long time. Like generationlaly long. It was a great stock for their parents, so they won’t let go of it, even though it hasn’t been a great stock for them. Here’s how AT&T has done since that January 1st, 2000 start date:
That $10k investment is now worth $4k. At various points along the way, you would have been forgiven for thinking the worst was behind you. And yet, here we are, with AT&T showing no price return since 1995.
Now on the total return level, the picture for AT&T looks better. It historically has paid a great dividend, and if you reinvested that dividend over the last 20-odd years you’d actually have doubled that $10k investment. And yet:
That’s how your AT&T total return stacks up against Amazon. And that gold line represents the S&P 500, which would have quadrupled your 1/1/2000 investment.
Here’s a chart from our partners at First Trust, comparing the top 5 names in the S&P 500 at the turn of the century to the top 5 names now, as well as their impact on the return of the market:
Given these varying factors and scenarios, it can be fun to play a game of What Would You Do? and discuss imaginary moves in retrospect. And it’s all too easy to apply those decisions to your current portfolio as if the journey of any of your investments will mirror those above, and as if you know that for certain.
Modern Portfolio Theory is meant to be the cure for all this second-guessing – diversify and allocate to every sector at every time and you’ll be okay. And if all else fails, you can always rely on the good ‘ole 60/40 portfolio, the retiree special, the everlasting investment standard.
…And yet, here’s how that portfolio held up compared to the S&P in 2022:
The gold line is the 60/40 portfolio this time, but honestly, you could be color-blind and realize the returns aren’t all that different between a 100% stock portfolio and a 60% stock portfolio.
And then recency bias kicks in, and the nuanced subtleties of modern portfolio theory are adjusted based on outlook. Wall Street fires up the talking heads and the strategists update their outlooks and it all gets filtered down to us.
“We must lower our expectations for the stock market moving forward! Less growth, more value! Bonds are dead money now! We need Alternatives to provide less correlation! We also need Alternatives to provide better returns! And Alternatives are more expensive, so we can charge more money for them and make up for the loss of revenue from our under performing stock and bond investments!”
And then, of course, the opposite of what everyone expected happens, and we get some version of this:
by fill bGrowth stocks up 27% YTD, Value stocks up… 5%. But hey, at least we’re up.
Investing is hard. Turns out diversification is hard too. None of us – NOBODY – is going to be right 100% of the time. The best we can do is put a plan in place that accommodates the most important factors of our financial lives – our ability to pay for what we need, when we need it and diversify for opportunities beyond that.
We shouldn’t expect to shoot the moon. We shouldn’t expect to find the next Amazon. But we should allocate for that potentiality.
Author Mark Manson sends out a weekly newsletter. I’d recommend it, as it’s a quick read and usually worth it. This week’s dispatch was titled “How to get lucky.” In it, he writes that “luck doesn’t just happen, it’s created. You can do things to increase the odds of serendipity.”
If we’re too risk-averse, we can miss out on the fortunate outcomes investing can provide. Better to be risk aware, realize where risk is appropriate and where it isn’t, and make room for opportunities without betting so aggressively that we lose the game. There’s nothing worse than shooting for the moon and ending up with the losing hand.
I’ve learned this the hard way. Maybe you have too. But the real lesson here is what we learn about ourselves, how we manage risk, what it does to us, what we feel when we FOMO over perceived under performance, and what behaviors might come from that. That perception isn’t universal, by the way – we all have our own expectations to under or over perform against.
The ability to manage those expectations, along with all the feelings, emotions, desires, and second-guessing that makes us all human… the proper allocation of THAT portfolio is how we win the game.
CoFi
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.
