Ten Things I Think I Know

Nick Foy, CFP®
nick@greenwaywealth.com

I’ve spent the better part of the last twenty years studying the capital markets, and trying to gain a better understanding of how they operate, and how investors react. As we ride through the current turbulence brought on by the news of the day, I thought I’d share with you some of the lessons that I’ve learned.

1. Money = emotion.

For the past 10 years, investing has been (relatively) easy. But as we tell our clients, it isn’t always so.

I learned this lesson best during my time at Vanguard. The economic malfunction of 2008-09 had a dramatic impact on investors, including Vanguard clients (who tend to be more disciplined than their counterparts who invest with some other firms).

Encouraging Vanguard clients to stay the course while the headlines gave them fits was a daily exercise in patience, but it also taught me how difficult it can be to maintain a long-term perspective when it seems like the world is falling apart around you.

People have hopes and dreams. They want to retire, send the kids to college, renovate their home, take a nice vacation.

Here’s what the wild ride looked like visually:


We all know what happened from there. The market did the same thing it’s always done: iit recovered. But in the meantime, it caused a lot of sleepless nights for people.

There’s no getting around the emotion that money and investing causes, but it comforts me to know that we can zoom out to get the big picture:

2. Sometimes, markets go crazy.


Depending on your perspective, and your allocation, this may or may not be a good thing.

Younger investors should be on their knees begging for a prolonged market route. Down markets actually increase our expected rate of return, believe it or not.

Older investors should be invested conservatively enough so that, if one happens, it doesn’t impact their ability to maintain their standard of living. When people get this wrong, it amplifies the emotion that money can cause.

3. Markets are efficient pricing machines.

As crazy as it may sound, markets are constantly digesting new information, and determining how much risk there is for any investment. A decrease in prices is a sign of a healthy, functioning market, as new information allows them to re-price risk.

The market is clearly responding to new information as it becomes known, but the market is pricing in unknowns, too. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. Our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding risky assets.

4. I have a high degree of certainty that the coronavirus will become a blip on the radar.

I have a son who is immunosuppressed, and is far more susceptible to illness than those of us with a stronger immune system. Right now, I’m far more concerned about influenza than I am about COVID-19. I think markets will figure this out eventually, too.

Last week I read a pretty level-headed piece by a Harvard medicine professor, and I thought it was worth sharing.

5. For balanced investors, the market tends to respond pretty well to crises.

6. Investors who stay the course tend to be rewarded for their discipline. Those who rebalance into down-markets have been rewarded even more handsomely.

7. You can’t expect return without risk.

Every investor is looking for maximum return with minimum risk, but the reality is that the two are evil twins who ruin every Thanksgiving dinner with their constant back and forth. You have to invite them both, though, or you’ll be in trouble with grandma.

For those who are happy with no risk and no return, the real risk over the long-term tends to be inflation which slowly erodes the value of our dollars, which leads me to my next point…

8. Over the long-term, the real risk is inflation.

Most people are afraid of their portfolio value suddenly evaporating because of markets gone mad. Their real enemy, though, tends to be inflation.

I compare this to the fear of flying. Many have a fear of flying, and some are able to overcome it and get on the plane anyway. Most of us won’t die suddenly in a plane crash. Instead, McDonald’s fries will slowly eat away at our arteries. According to the CDC, about 647,000 Americans die from heart disease each year—that’s 1 in every 4 deaths.

The last time someone died in a commercial air crash in the United States was February of 2009.

Inflation is like heart disease for your portfolio.

9. You need to have a philosophy and a process for investing.

As a Greenway client, you would have both! As we’ve mentioned in the past, our philosophy and process integrate what we know about markets and how they behave (and sometimes misbehave) over many decades. It means controlling what we can, and ignoring what we can’t, and buying more assets with higher expected return as opportunities present themself.

10. This too shall pass.

As always, I welcome your feedback and please don’t hesitate to reach out and let us help you.

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