Who doesn’t like getting insights into the balance sheets and investment portfolios of other people – especially when those other people are successful professionals or financial experts?
CEO and co-founder of Ritholtz Wealth Management, Josh Brown, recently compiled a collection of exactly that in his book, How I Invest My Money, edited by Brian Portnoy and illustrated by New York Times’ columnist Carl Richards.
The book shines a light on 25 financial pros and how they use their own money to invest in capital markets. It’s a great look at how people who often give financial advice actually manage their own assets.
That inspired me to share my own strategy. I recently produced a video about how I invest my money. In telling my story and experience, I realized there were two specific events that helped shape the investor that I am today.
Developing My Current Investment Strategy Was a Process
Today, I invest for the long-term using a broad basket of ETFs that track broad market performance. I don’t try to time the market, and I don’t try to pick individual stocks.
Developing this investment strategy didn’t happen overnight. It took time to develop my personal investing style.
It also took two formative experiences that I can credit as the big reasons I am where I am today. In short, I learned the hard way why trading individual stocks is not the best way to grow wealth for the long-term.
My Investing Experience with Webvan
If you remember the early 2000s, you likely remember the dot-com bubble. A lot of investors felt overly confident in the futures of tech companies that were riding the wave of growing adoption of the internet and the spreading of personal computers in households all over the U.S.
I believed the hype; I was fully immersed in the boom and believed that it would never end. At the time, I worked as an analyst in Morgan Stanley’s Private Wealth Management division. It seemed like investors were simply printing money by jumping into IPOs.
Anyone could get rich by holding onto anything with a .com after its name. Of course, I wanted to do the same.
The company I got behind was Webvan Group, an online grocer that looked destined for success (but was, in reality, at least two decades before its time).
Justifying that this was just the stock going on sale, I bought in. And I kept buying. I bought shares at $15, $10, and $5. And I held them all the way to the company declaring bankruptcy.
Failing to Buy and Hold with Amazon
I made mistakes on the other side of the coin too. Instead of hopping into a bad bet and riding it to the bottom, I bet on a big winner… but didn’t stick around to see it pay off.
I bought shares of Amazon in 2012, when the share price was about $250. Over the next year, Amazon’s stock price shot up to over $300 a share.
I sold my shares in 2013, feeling pleased to get out before anything bad happened – and with a 20% profit to boot.
Fast forward to 2021 and we can clearly see that what seemed like a brilliant move at the time was actually a pretty terrible idea. Amazon now trades at around $3,000 per share.
That’s roughly 1100% higher than when I originally bought it!
What My Misadventures in Stock Picking Taught Me About Investment Strategy
These two stories illustrate a clear point: without the benefit of hindsight, it’s almost impossible to tell which individual stocks will turn out to be winners and which will go all the way to $0.
It’s easy to look back and laugh at my investment in Webvan. Clearly, that was doomed to fail as part of the dot-com bubble… right?
The truth is, that’s only obvious today. It’s easy to forget that Amazon was also an internet/tech company of that same era.
The problem with individual stocks is that you must know precisely when to buy. And that’s only half the equation. You also need to know exactly when to sell. Again, you can only know either, with certainty, when you look back with the benefit of hindsight.
This is why I no longer engage in the guessing games that individual stocks require you play. I also invest with intention and a plan, and don’t let emotions (like fear of a stock price dropping) make my decisions for me.
Instead, I rely on sound strategies based on my goals, time horizon, and risk tolerance. I combine those specifics about my own situation with experience and education about market history and new research and data that supports more passive, long-term approaches to investment management.
We use this same facts-based approach for our clients, too, to design investment strategies that meet their needs and take into account unique factors like their individual appetites for risk.
My process for investing will continue to evolve, but it won’t be influenced by randomness, chance, or emotions. Instead, we’ll continue to refine and hone our approach based on the facts and studies that highlight smart ways to grow wealth over time.
The fear of missing out is real in many aspects of our lives. Today more than ever, with how ingrained social media is in our society, it’s hard not to let that fear, or FOMO, affect how you think and feel about your own decisions.
FOMO impacts all of us. I see it everywhere, and in almost everyone—from my 11-year-old twins when they hang out with their different groups of friends, to my clients who question if they just missed out on the next best investment.
I can admit I’m guilty of it myself, and I work to stay aware of this fear. For me, it comes up when I look at Bitcoin and think, why didn’t I just buy a few coins to try it out? Or when I read the latest headlines and wonder, why didn’t I buy some Tesla shares years ago?
We can’t get rid of these thoughts or feelings, those worries or fears that we missed out on what everyone else is enjoying or doing right. What we can and should do, however, is learn to recognize FOMO when it pops up for us—especially in the realm of our money and our investments.
Investing Is About Managing Money and Emotions
When many people think of investing, they assume the focus is on the analytical side of things. But for individuals, their investment experience is often defined not by numbers or statistics or data points, but by their own emotions.
One of the biggest emotions investors experience is fear. Fear of missing out on something, be that “the next Apple” or the market timing to avoid a future dip, is very real.
It’s also a very compelling feeling. Investing FOMO can be difficult to simply ignore it in favor of sticking to a rational, strategic investment plan.
Again, you don’t need to get rid of all fears of potentially missing out. What you do have to learn is how to handle FOMO when it tries to influence your investment decisions.
Learn more about how behavior can cloud your investing focus in Episode 9 of The Build below!
Awareness Is a Key Tool in Combating Investing FOMO
The best way to put the breaks on investing FOMO—or at least, to not let it make your decisions for you—is to be aware.
First, when you feel FOMO creeping up, simply acknowledge it. It’s completely normal to feel this way. It’s not necessarily a sign that you need to take action.
Investing FOMO can be so powerful because none of us wants to make a big mistake with our money that will cost us an opportunity to grow wealth or have enough in assets in the future to support our families and enjoy the life we want.
It helps to understand you will probably always have that worry, no matter what you do. Even if I buy Bitcoin or Tesla, there will still be some other stock or investment out there that will grab headlines and leave me thinking, “why didn’t I buy that instead?”
Second, work on getting to know yourself. For example, I know myself well enough that I don’t have the stomach to hold individual, concentrated positions. I’d always be tempted to sell out of my shares for fear of the price dropping (which is exactly what I did with Amazon back in 2012).
By the Time You’re Reading About It, It’s Probably Too Late
A third helpful way to manage investing FOMO is to understand how the financial news works. The headlines you see are inherently going to be:
About something that is already in motion (meaning, you are not going to get the inside scoop on a great investment in the news; other investors already beat you to it)
About anomalies and outliers; it’s news because it’s not normal!
Take the Gamestop story that cropped up in early 2021. If you read about the rally in the Wall Street Journal and wanted to buy in to assuage your feelings of FOMO, it was probably too late. You might have been one of the investors who bought at the peak and got left holding the bag when the stock plummeted shortly thereafter.
The story itself was highly unusual. That’s exactly why it made the news in the first place! That’s likely the case for any sensationalized investment that “everyone” is talking about: it’s an outlier, and outliers are very difficult to spot without the benefit of hindsight.
Another thing to consider is what you don’t hear about in the news (or in people’s normal, everyday conversations, for that matter). People will always brag about their winners. But they almost never talk about the bad trades and financial mistakes they have made.
Anyone who brags about a homerun investment has definitely struck out multiple times on other investments—whether they tell you about them or not.
FOMO Hurts, But Boring Really Is Better
There’s no denying the fact that the fear of missing out is painful. FOMO isn’t fun to experience. It can be agonizing to wonder if you’re the only one who isn’t getting rich for the latest fashionable investment trend.
If nothing else, know this: your worries are not representative of reality for a number of reasons. For one, it’s easy to feel like everyone but you are benefitting. But in reality?
The number of people who hold Bitcoin is tiny compared to the global market of investors. The number of people who made money off of Gamestop may be the hundreds or even thousands – but it’s probably not more than that, which is nothing when you consider the millions of people who are just investors in America.
And two, it’s the boring stuff that works! There are no reliable “get-rich-quick” schemes. But maintaining a portfolio of low-cost, globally-diversified mutual funds and ETFs and taking advantage of strategies like dollar cost averaging and dividend reinvestment will help you build assets over time.
You can know all of this, and still have FOMO. That’s okay to feel the fear of missing out. What you want to learn to avoid is taking action on that fear because, in all likelihood, it’s unfounded.
Don’t give in and chase the next hot investment. Feel the fear—and stick to your investment strategy anyway.
Once you get a realistic understanding of what to expect from your investment return, you’re better prepared to face the next challenge the market throws at investors: dealing with its ups and downs.
Knowing the expected average return of a particular asset class isn’t particularly helpful when you find yourself on this roller-coaster ride. For most people, hearing that stocks average a 4.8% return over the long run is quite unhelpful during a period of time when the market keeps going down.
How Recency Bias Can Get in the Way of a Positive Investing Outcome
We can thank something called recency bias for this. Recency bias is the tendency to think that whatever happened in the immediate past will continue long into the future.
It doesn’t matter what the long-term average is, in other words, to someone with a portfolio that just dropped 15% and is now looking at a whole lot of red. Most people can’t think rationally and logically enough to get through that period of time.
They panic instead of being patient because they feel like it’s never going to get better and it can only get worse. They let their emotions get the best of them and end up selling out of the market.
The mistakes only continue from here. What an investor like this has just done is sell low, and they will most likely wait until the market has absolutely, definitely improved before they jump back in… at which point they’ll buy high.
This is literally the opposite of what you need to do as an investor.
What can help you avoid this unfortunate situation and negative investing experience is to prepare yourself to ride out those ups and downs that we know will happen on your way to a long-term investment goals.
First, Understand That Market Ups and Downs Are Normal
The market tends to be cyclical, with periods of expansions followed by periods of decline — until the cycle starts again and things trend upward.
We know the market usually moves like this. What we don’t know is when it will move either up or down. But that’s okay! We don’t need to know that.
All we need to know is to expect ups and downs. This chart can help show you how this has always happened in the market in the past:
This chart outlines some of the generally-accepted descriptions of these large movements, both the upswings and the declines. For now, let’s focus on the declines since downward movement is the kind that concerns most people.
Here’s some of the most important points this data makes:
● In 56 of the 71 years of this study, there was a decline between 5-9.9%, with an average drop of 7%, lasting one month and then taking 2 months to get back you to even.
● In 21 of the 71 years, (roughly once every 3 years) there was a decline between 10-19.9%, with an average drop of 14% lasting 5 months and an average of 4 months to recovery.
Let’s take a closer look at that second point. It tells us that about every 3 years, the market will drop on average 14% over a 5 month period. When that drop is complete, it will take another 4 months, on average, to come back.
What I suggest that you take away from this is that markets do fall. And they tend to recover. Over time, that recovery has only taken a few months — so it’s well worth staying calm, learning to accept that ups and downs are a normal part of investing in the market, and staying in your seat.
Conclusion: Stay in Your Seat!
The market will rise and fall. And that’s okay! It’s not always supposed to go up — but you are supposed to stay calm and not let your emotions in the moment get the best of you.
Remember to focus on what you can actually control (which is not market movement).
Don’t twiddle with your portfolio (especially when you’re feeling emotional). Make sure your investment decisions are not based upon market drops (or increases). Don’t try to time the market. Create an investment strategy based on your needs and goals — and then stick to it!
Finance is littered with jargon, and nowhere is that more evident than in everyday investing. I believe the majority of investors do not need to follow the market every day or even every week; however, there are basic financial concepts that can be worthwhile for you to understand.
Here is what you need to know when it comes to the daily market and the actions you, as the investor, can take.
The “Market” And Associated Terms
Let’s start with a financial headline and some terminology. A common financial phrase you have likely read or heard on the news sounds something like this:
“The Market was up10 points today on better than expected 3rd quarter earnings at ”
The Market
· The majority of the time “the market” actually refers to the stock market and, more specifically, the S&P 500 (which represents the 500 largest US companies and has become the standard measuring stick for judging the success of “the market”). Historically, the Dow Jones Industrial Average was the standard gauge, however the fact that it is only comprised of 30 companies makes it less representative of the broad market. “The market” can also mean such things as the bond market, treasury market, and housing market.
Up 10 Points
· When the term ‘up 10 points’ is used in connection with the market it means that the index went up 10 points from where it began on that same day. For example, a rise of 10 points on the S&P 500 that started the day at 2570 is a .39% gain. So taking the average of all of the price movements of the underlying stocks of the index that day comes out to a gain of .39%.
Earnings
· Essentially, earnings are the amount of after-tax profit a company earns during a given time period, usually over a quarter (three months) or a year. Market analysts make quarterly and yearly estimates of each company’s earnings. If a company manages to exceed these estimates, this company is said to have ‘beaten earnings.’ When this happens, it is usually a signal to the financial world that the company is performing well and is likely to experience continued success.
What All This Really Means For You
Not much! As a long-term investor, daily market activity has very little impact on how well your overall investment strategy performs. The market will fluctuate, that’s what it does. On some days, investors can observe extreme levels of volatility (a measure of price fluctuation).
Pundits and analysts are always trying to explain away market movements, but the reality is that many factors, many external to the markets themselves, drive daily fluctuations in the market. Politics, international conflict, natural disasters, and the supply and availability of certain commodities (like oil) can all cause the market to swing.
So what action should you take as a long term investor after a bumpy day in the market? None. Your investments decisions should be based on your individual goals, time horizon, and risk tolerance and should not shift based on a bad day in the market.
Therefore, as a long-term investor, you can view the market more as an interesting news headline that reports on the daily emotional pulse of the economy rather than a predictor of your future financial success or demise. No single day of trading in the stock market should have much bearing on your personal finances if you’re saving for retirement in a well-diversified investment portfolio.
Conclusion
No one knows what the future holds. If we did, we would all be able to spot the next .com boom and Amazon. Day-to-day market movements are irrelevant for the long-term investor; and earnings, while important, are more of a game that traders and analysts play for short-term profit (trading around expectations, if you beat earnings your stock goes up, if you don’t it goes down) than long-term financial independence.
You’re young, you have a family… so why on earth are you wasting your time worrying about what the stock market is doing? After all, who KNOWS what it’ll be doing 30 years out, when it’s actually going to matter for you.
I see this all too often: investors get carried away watching Bloomberg TV or CNBC, riding the emotional ups and downs of monthly, weekly (and even daily) fluctuations in the stock market. I can only hope they’re not risking their savings on short-term investments and hoping for fast payouts.
If you were my client, I would tell you to stop worrying about what the stock market is doing. Instead focus on things you can control, like saving, spending in line with your goals and values, insurance, and estate planning. If you’re in your 30’s with a young family, I definitely put emphasis on the saving part.
Saving: The Best Thing You Can Do For a Young Family
When you have a young family, there’s an awful lot that’s vying for your wallet’s attention, but saving is among the top concerns you should have right now.
One of the great things about being so young is that you have time on your side when it comes to saving. It’s just the way the stock market works: invest for the long term and statistically, you’re likely to see far greater returns. Besides, when you plow your dividends back into your investments, your savings grow even faster… exponentially, even, since you’ll be increasing the pot in more ways than one.
Of course one of the ways investing for the long term makes total sense is for your retirement. And no, it’s not too early to start saving. In fact, I’d advise any client not to follow the herd when it comes to retirement savings.
Be Different From Other Americans: Save for Retirement
Right now, only 21% of American workers think they’ll have enough money for a comfortable retirement (and that’s up from 13% just three years ago).
That stands to reason, since the average American household has only $36,250 saved for retirement. 40% of American families aren’t saving for retirement at all! Please don’t be like them.
Instead, save for retirement. Better yet, automate your saving behavior so that you don’t even have to think about it. You can set up automatic deposits into your after tax retirement account from each paycheck. This system ensures that you’re always saving and it’s money that you never see in your checking account and therefore never miss. You can always adjust the amount of your deposit if necessary, but the point is that you prioritize saving by having it handled automatically.
Invest in the Market for the Long Term
Whether you’re saving for your child’s college education in a 529 Savings Plan or putting away money for retirement, you should be thinking in terms of decades, not years. Trying to make money with short-term investments is risky, to say the least.
If you’re investing with an eye towards using the money in 5 or 10 years, that’s not long-term investing. You need to really consider how a bad stretch of market returns (think 2000-2010) will affect the chances of achieving your goals.
So, don’t waste your time listening to the noise. Instead, invest in balanced, low-cost funds that will stay with you for the long haul.
Planning for the future requires a ton of self-knowledge, a clear vision of your options, and a firm resolution to stick to a plan. Need help with that? Lake Road Advisors would be happy to explore your financial questions, contact us here.
Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY,Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network. They can be reached by phone at the Corning, NY office at (607) 438-2914, Ithaca, NY office at (607) 463-8400, or Portland, OR office at (607) 292-2172 or at the firm’s website at https://lakeroadadvisors.com/
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
Is now a good time to buy Corning? What do you think about Apple? Is Gold a smart investment?
As a financial planner and investment advisor I am often asked “Is this a good investment?” Here are 5 questions you should ask yourself before you move forward with making any investment.
1. What is your goal for the money you are investing? How much are you hoping to earn on this investment?
Earning a return on your money is only part of the equation. What do you want to do with the money? Build up your savings, set aside for a new home, a vacation, or make charitable donation? Do you have an exit strategy? Is a 20% gain enough to achieve your goal or will you be happy with a 10% gain?
2. Do you understand the downside risk associated with this investment?
The opportunity for a large gain always comes with the possibility of an equal or greater loss. This is the risk/reward tradeoff. There is no “free lunch” when investing. Do you know what this loss is?
3. What is your risk tolerance?
Everyone says they can handle risk until the market drops (ex. January 2016). Make sure you understand that markets fluctuate often and sometimes with great volatility. Will you be comfortable staying the course and not selling your investment when this happens? If you can’t, then this is not the right investment for you.
4. Do you understand the fee’s associated with this investment or product?
Is there a flat fee for this investment or is it sold with a commission? How is the person selling you this investment incentivized? Fees and incentives do matter and be sure to ask about both.
5. How does this fit into your overall plan?
Is this investment more than 10% of your overall net worth? If so, you may want to reconsider it’s appropriateness in your financial plan.
The next time you think about an investment first think how you answered these questions.
