Britain is leaving the European Union, US deficits are burgeoning, price-earnings ratios push multi-year highs, US stock are tumbling and, oh yeah, the sky is falling. The host of reasons why markets are plummeting is now permeating the financial media. Fear is good for news outlets.
Now let’s consider what we know.
Terrorists’ brought down the two tallest buildings in NYC on 9-11. The worst financial crisis since the Great Depression decimated global markets by more than 50% late in the prior decade. Nuclear bombs exploded over Japan. Wars were won and lost. Presidents were shot. Inflation ran rampant for a decade, multiple recessions, a depression, and an “energy crisis” were thrown in for good measure.
In spite of all the bad news, US Stocks have compounded close to 10% for the past 25, 50 and 75 years.
Bad news will never go away; nor will good news. Uncertainty will never go away either. Long-term investing requires both courage and patience. The courageous provide liquidity when the crowd is selling. The patient live with uncertainty and hang on during tough times. The patient and courageous receive higher returns and have for decades.
Portfolio structure determines how investments perform in any market. The percentage allocated to stocks vs. bonds determines both risk level and potential for reward. In simple terms, the more bonds one owns, the more one limits downside risk. The more stocks one owns, the higher the expected return and commensurate risk. Controlling costs and limiting turnover enhances returns.
Smart investors’ accept uncertainty and short-term fluctuations in expectation of higher returns. Fools follow the news and struggle to beat simple benchmarks.
Be smart, be patient, be courageous and reap the rewards.