Since I wrote about the Stockdale Paradox in the May issue of Asset Class, I’ve continued to think a lot about the concept of “survival” and what it might mean to the average person. Admiral Stockdale’s experience was extreme, rare, and horrifying. But the lessons he learned carried him through the rest of his life and can be applied to so many circumstances of our own lives.
The most important thing I learned from Admiral Stockdale is that it’s not the degree of adversity or pain (emotional or physical) we feel in the survival experience or even the length of time we’re in survival mode that’s important but rather what we learn during the process that will guide us positively in the future.
Bringing this into focus for long-term investors, it’s critical to understand that unlike Admiral Stockdale, who found himself in a situation he had almost no control over, we often impose investing stress and anxiety on ourselves, compound the degree of these emotions with emotion-based decisions, and allow ourselves to endure this pain and stress much longer than we should. Even after we’ve taken intelligent steps to correct our course, we sometimes question ourselves and revert to our old ways.
Why do we do this??
I believe the answer always boils down to a matter of confidence. And having confidence born of evidence-based knowledge and experience is the only way you can ensure your long-term investment plan and your peace of mind can survive unbroken during challenging times such as what we’re experiencing today.
Confidence doesn’t mean certainty. If certainty is your goal in investing, you are certain only to fail.
Investing is ALL about probabilities. Therefore, statistical probabilities should determine your overall investing approach (e.g., “passive” versus “active,” long term versus short term, high diversification versus low diversification), the specific “tools” you use to build your portfolio (asset classes, investment vehicles, and management techniques such as rebalancing), and your choice of investment advisor (or whether you even should have one).
So, what do the odds favor from a risk/return perspective?
1. A long-term view over a short-term view.
2. A buy-hold-rebalance strategy over market timing.
3. Highly diversified indexing (passive) over any form of individual stock or bond picking (active).
4. A high-quality, short-term bond strategy over a lower-quality, longer-maturity bond strategy.
5. A small-cap and value tilt to passive asset class portfolios over indexed total market diversification.
6. Investments intelligently designed to more fully capture small-cap and value stock return premiums.
7. The advice of an experienced, disciplined investment advisor with a documented track record of high-probability investing over a do-it-yourself approach.
All of these increase the odds of your investment success, and all have been documented with references for over 27 years in Asset Class articles. If you need to be reminded of this evidence, please call your Equius advisor for the data and references. If you’re reading this and not a client, call us at 800-826-4015 and we’ll provide you with the same information.
This V represents a victory for patient and calm investors, not an opportunity for speculation.
Paraphrasing Admiral Stockdale, we never should confuse optimism with the discipline necessary to confront the brutal facts. Optimism and pessimism are short-term emotions that have a nasty way of convincing you to make changes in your portfolio. The more you look at your portfolio and listen to the opinions of media charlatans, the more you let these emotions guide you.
The graphic shows 23 days this year when the S&P 500 dropped 34% followed by 80 days when it gained 44%—but it went neither straight up nor straight down. At what point should one become pessimistic (and get out)? At what point should one become optimistic (and get back in)?”
Don’t allow yourself to try market timing. It will almost certainly destroy wealth you’ll never recover.
Read a book, take a walk, pet your dog…anything but try to predict the market in the short-run (or allow someone else to do it for you).
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