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Focus On What You Can Control

As of this writing, the S&P 500 is approaching an all-time high, while COVID cases are themselves reaching an all-time high and there continues to be uncertainty around the transition of power for the US Presidency. For many, this is absolutely perplexing. How can the US stock market (the S&P 500 represents about 80% of the size of the US Stock Market), be approaching all-time highs at a time like this? It's a very valid question and concern. As humans, we are challenged by these things because we desperately seek patterns and answers. But also, we tend to be pessimistic. In fact, we feed off of negativity. Google "Human Negativity Bias" if you don't believe us. It's pretty clear how this plays out in investing: we tend to feel more "pain" from markets dropping than we do "pleasure" from markets going up. But it also means we like to focus on the negative. And it's not hard to find the negative, because it's everywhere. In fact, this morning, we clicked on a news provider's email and the top 3 stories were: Why The World’s Soaring Home Prices Could Be Poised To Tumble, Three Reasons A Coronavirus Vaccine Isn’t Actually Good News For Investors, and Why Oil Stocks Will Be Worth Nothing In The Long Run. Can there really be no positives in the news? In reality, unemployment continues to improve (albeit from a pretty low point in March), consumer spending is still strong (the majority of the US economy is built on consumption), and inflation is nowhere to be found (in fact, you can get a brand new 4K big screen TV for about $300 nowadays!). But this is how we operate. In 2011, famed psychologist Daniel Kahneman even wrote in his book “The brains of humans and other animals contain a mechanism that is designed to give priority to bad news. By shaving a few hundredths of a second from the time needed to detect a predator, this circuit improves the animal’s odds of living long enough to reproduce”

And the news media is nothing but happy to indulge us in our desires. A political scientist named Stuart Soroka showed that there is an INVERSE relationship between the positivity of a magazine's cover and its sales. In 2014 an experiment was done by a city newspaper where it only printed positive news. It's sales quickly dropped by 2/3. Our point here is that 1. As humans, we tend to focus a lot on the negative and that can have real consequences around our actions, and 2. Bad things do happen and will continue to happen. However, that is already priced into risk assets. The reason that we expect a diversified portfolio to earn 5-7% per year over the next 10+ years is that there is risk involved. Today, if you lend your money to the US Government for 10 years, you will earn about 0.8% per year. So earning an average of 5%+ per year involves risk. In fact, about 6 times as much risk as just lending to the US Government. In any one or three-year period, you will NOT earn that average 5%. In fact, over the entire 10+ year period there may never be a single year where we see that 5%. More often we see -10%, and then +12%, and then something else still. The problem is that if we try to guess every period where the "top" and "bottom" will be, we will miss it. Sometimes that is not a big deal, but sometimes it is a very big deal. In fact, missing some key periods of market outperformance is one reason that JPMorgan found that the average investor only earned about 3% per year from 2000-2019, while just about ANY investment earned more than that over that same 20 year period.

So we urge you to focus on what you can control. Exercise, eat well and take care of yourselves. Let the markets do their thing. There is a rather famous saying in finance: Time in the market is more important than timing the market.