Long-Haul Investing and Parenting Parallels

My poor kids. Someday, I'll have to apologize to them for mentioning them so often in our blog. But as a parent and an investment advisor I can't help myself. Write what you know, as the saying goes.

So, how about those financial markets last week? They reminded me of the mixed emotions I have as my children's father and guardian. Usually, I'm blown away by how lucky I am to be raising the most amazing kids on the planet. Then – oh my gosh – one of them starts to choke, or takes a tumble into the coffee table. Joy turns to terror. Pride becomes panic. Then, almost as immediately, said child is off and running again, headlong into their next adventure/calamity.

The same could be said for your stamina as an investor. One minute, the S&P 500 seems unstoppable. The next … Well, you saw what just happened on October 10: A sucker-punch stumble, followed by (mostly and so far) a rapid recovery a few days later. We knew to expect it at some point, but the sudden volatility can still make your head spin.

It can also offer an important reminder. In early October, I noticed many investors were second-guessing their well-structured, globally diversified portfolios. As third quarter returns rolled in, some were comparing their relatively modest year-to-date returns to a high-flying S&P 500, and wondering whether they should abandon their personalized plans in pursuit of the parade.

If you are going to manage your own money, I encourage you to reflect on last week's turbulence as an excellent illustration of why we advise as follows:

1. Don't compare your portfolio performance to your neighbor's. They may be earning more today, but higher returns strongly imply they'll face higher risks when trouble does arise. Besides, your goals and risk tolerances may vary widely from theirs. 
2.  Don't compare your portfolio performance to the S&P 500. While this benchmark index is often thought of as reflecting the entire market, it's actually only a proxy for large U.S. company stocks; even for that, it's still an approximation at best.
3. Don't compare your portfolio to what might have been. Last week's nose dive made it clear: You're better off globally diversifying your risks and sources of expected return, rather than trying to identify where all the best lightning bolts are going to strike next.

Better yet, unless you're able to always adhere to all three of these timeless tips, might I suggest we objective advisors can be worth our weight in reasonable and transparent fees?

When the markets are all sunshine and smooth slopes, it's easy to assume you can succeed on your own. After all, as "Reformed Broker" Josh Brown described in one of his typically tongue-in-cheek posts: "Asset allocation is now free. Here are five ETFs, rebalance a few times a year and mumble something about tax-loss harvesting. Big deal."

But, as Josh adds, "Focusing on the performance or cost of a portfolio relative to something other than a plan is like decorating a house that has no foundation. Making poor decisions – even if at a low cost or even no cost – won't do anyone any good. … But a financial plan, well-executed and tenaciously adhered to…well that's priceless."

In short, your greatest challenges aren't the costs of investing, or whether the S&P is going to rise or fall over the next little while, or whether you're making or losing money this week. These components are worth monitoring, but they pale in comparison to two tandem forces:

1.  Having an investment plan – tailored to your personal financial goals and risk tolerances.
2.  Having the resolve to stick with your plan – whether on your own, or with an objective advisor who's there to remind you: you're in it for the long haul.

FVIM is an independent, fee-only registered investment advisor. We partner with individuals & families to manage assets and provide financial guidance relevant to their personal goals and objectives.