“We have long felt that the only value of stock forecasters
is to make fortune tellers look good.”
— Warren Buffett

In my previous two columns, I talked about the first two steps in financial planning: acknowledging the need/desire to plan and steps to creating a plan (a roadmap) to meet goals.

Then — and only then — is it time to begin working on investment strategies.

Investment plans should be carefully constructed based on the financial goals you hope to achieve, the time horizons to meet them, and your risk tolerance.

What you will read in this column is markedly different than the short-term predictions you’ll see on money channels or from purveyors of financial products — most of which should simply be considered entertainment.

Warren Buffett’s quote is right on — consensus forecasts for 2008 called stocks to have a good year with 8% to 10% returns. Sadly, the benchmark S&P 500 was actually down 37% for the year.

When investing, it’s important to start with some fundamentals. Markets are volatile — always have been/always will be.

Risk and reward go hand in hand. There is no such thing as a low-risk/high-return investment — Bernie Madoff proved that.

There is a big difference between trading and investing. Costs and taxes matter. Thoughtful investing is boring, but if you want excitement, take your money to Las Vegas.

Perhaps most important, recognize the potentially harmful impact of human emotions on long-term investment success.

Finally, there are no guarantees when investing — and past performance is no guarantee of future results.

The ideas shared in this, and my future columns, are generally consistent with strategies used by wealthy individuals and large institutions to “keep and grow” money.

Investments should first and foremost be focused on your goals, and consistent with the financial plan you’ve created.

While there are many other shorter-term goals, the focus of this column will be investing for retirement, the top financial concern of most Americans, according to Gallup.

While the goal of a secure and comfortable retirement is the same regardless of your age, time horizons are clearly different for investors who are 30, 50, 70 and 85 years old.

Time horizons matter as market cycles can last a very long time. Consider results of the S&P 500 from 1926-2023:

• 1-Year: The best return was +52% (1954) with the worst at -43% (1931).
• 10 Years: The best annualized return was +21% for the 10 years ending 1959 — with the worst return at -5% for the 10 years ending in the summer of 1939.
• 20 Years: Extending the time horizon to 20 years reduced the best outcome to +18% through spring 2000 with the worst being just under +2% for the 20 years ending in 1949. (More than 90% of the 20-year periods saw annual returns of 7% or higher. With no guarantees, history would argue that giving markets time to deliver returns is important.)

History shows that stocks earn higher returns than bonds over most long time periods.

So, why would anyone include bonds in a portfolio? The answer is to reduce volatility — risk!

With more than 40 years of experience advising clients, I never found a single person who could truly tolerate the volatility of an all-stock portfolio.

When markets are euphoric, people will eagerly say how risk-tolerant they are. But those very same people will tell you they cannot lose another dime when markets fall dramatically.

Prudence suggests finding a mix of stocks, bonds and cash that is designed to seek returns needed to meet long-term goals at a level of risk that actually can be tolerated.

The process of allocating between different asset-classes (U.S. stocks, non-U.S. stocks, emerging markets, real estate, bonds and cash) is key to building a portfolio you can live with.

Using market indexes, a Russell Investments study calculated that a global 60/40 stock/bond mix earned 81% of the S&P 500’s return with just 61% of the risk for the years of 1976 to 2021.

The Great Recession year of 2008 was the worst year over that period. The S&P 500 was down more than 37% — and while still awful, the 60/40 balanced strategy was down much less at -24%.

And while that stretch included six recessions, a tech bubble/burst, the “great recession,” and a global pandemic, all major asset classes and each asset-allocated model produced solid long-term results. 

Choosing a strategy — a well-diversified mix of stocks, bonds and cash that is consistent with your goals and time horizon — and then sticking with it to enjoy the long-term rewards markets offer seems simple.

But sticking with it turns out to be harder than you might imagine. Buffett was once quoted as saying “the stock market is a device for transferring money from the impatient to the patient” — and any student of financial markets would find these words ring true.

But most of us aren’t very patient by nature — and our 24/7 headline/data driven world sure doesn’t help.

Most of us are victims of two very powerful emotions: GREED and FEAR. We even have acronyms for this: “FOMO” (fear of missing out) and “FOBI” (fear of being in).

These are nicely shown in the illustration below.

The data is clear — investors tend to load up on stocks when markets are euphoric (“FOMO”) — and then dump them (capitulate) when markets are scary (“FOBI”).

Everyone knows you can’t make money if you “buy high” and “sell low” — yet that’s precisely what too many folks do.

Investors tend to pour money into a “hot fund” that’s enjoyed high recent returns only to pull funds out after performance sours.

Morningstar has long demonstrated that investors lag the returns of the very mutual funds/ETFs they own by 1-2% annually due to timing of purchases/sales.

Over the years, I witnessed the power of fear first-hand. The worst time was during the “great recession” marked by the failure of Lehman Brothers. The S&P 500 lost more than 50% of its value from Oct. 9, 2007, to March 9, 2009.

I had grown men in my conference room literally in tears as the news each day got worse, and their account balances kept falling.

Some wanted me to “sell everything before they lost it all.” My advice to “stay the course and ride out the storms” was incredibly difficult to give — and tough medicine for clients to take.

But history has shown time and time again the merits of this advice as markets eventually rebound after times of trouble.

On March 9, 2009, the markets did in fact begin to rebound despite continued bad headline news. By mid-May, the S&P was up more thanb 30% — and had risen more than 60% by year-end 2009.

Can you imagine the financial nightmare that investors faced if they sold during the meltdown and missed a strong recovery?

And while greed is less powerful than fear, it’s still a big factor in investing. One need only think back on the tech bubble in the late 1990s with folks loading up on high-flying dot.com stocks only to watch the bubble burst in 2000, leaving so many with big losses.

Stories about the negative impact of emotions on investing are endless.  

The desire to try and time markets seems never-ending — and the news media sure don’t help.

As Vanguard founder Jack Bogle once said “the idea that a bell rings to signal when to get into or out of the stock market is simply not credible. I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.”

Bogle nailed it with that quote, which in turn argues for creating a prudent investment plan and then sticking with it.

It turns out that it’s the “sticking” that is so important to long-term success, yet so difficult to do. In my experience, allowing your emotions to control investment decisions is doing a very wrong thing.

In my next column, I’ll dive deeper into investing strategies, but getting these basics right first is essential.