An Investment Tug-of-War: What Is Best and What You Can Tolerate
Investors want both low volatility and the highest possible returns. Unfortunately, that option is not always available but not because there are no strategies but because of investor temperament. Choosing an investment strategy that is suitable for an individual investor is not as easy as it seems. Whether an investor manages his or her own assets or employs an advisor, emotions may cause poor decisions to be made during times of market volatility. As an investor, can you trust your emotions? That question can only be answered after proper education on investment fundamentals.
Do you know what your reaction would be when the market turns against you? When things are going well, investors are generally satisfied with any investment strategy as long as asset values are rising. But the minute things turn for the worst, investors can panic and abandon any investment approach, even those that are effective over time. The key to success at times when markets are turbulent is to trust the process, assuming you have one in place. But you are not alone as even highly educated professional investors can have their confidence shaken by a turbulent market if their investment strategies are nothing more than bets on a future that they cannot predict.
Do not allow your emotions to cost you money by abandoning a well thought out investment process if you have one. Even the simplest investment approach can be difficult to stick with in times of extreme market volatility. Take for example, the worst return for a one-time investment held 30 years in an S&P 500 index fund is about 8.5 percent. Keep in mind that this fact holds true for 30-year periods including the great depression. The question remains, if you started your one-time investment at the beginning of the 2008 monetary crisis, would you have abandoned your simple buy and hold approach despite your strong chances of future success? Unfortunately, there were investors who abandoned their strategies despite historical evidence supporting their initial decision to buy and hold for 30 years.
Abandoning a solid investment approach in times of crisis will certainly cost you money over time. An investment strategy should always make sense to you, and you should understand how and why it performs the way it does when markets are calm or turbulent. Simply put, if you do not understand and have confidence in your strategy, you will never be able to stick with it. As an investor, you should ask yourself or your advisor questions regarding why and how a strategy works. The more complicated it sounds, the less likely it will be effective.
Is the strategy you currently implement providing the best return or the one that you can stomach emotionally? Maybe you should pick a strategy with lower return expectations if it provides you with the emotional comfort that you need. At Investoristics, our investment strategy is clean, simple, and both easy to implement and understand. So, if you need a solid, high performing investment strategy that has significantly outperformed all market indices over time with lower risk then our approach might be right for you and your temperament.
