I figured we would just get right to it this week. Isn’t that what everyone wants, superior outcomes? Yes indeed, there are steps that you can take to influence outcomes, but don’t let anyone tell you outcomes can be engineered or precisely controlled. They can’t.
Human behavior is by far the most important ingredient in achieving good long-term outcomes. We crave certainty and want to believe gurus “know” what is going to happen in the markets. Here is a list of these gurus who have consistently called market tops and bottoms.
No, I didn’t forget the list. It just doesn’t exist! The list is blank.
Seeing Patterns When None Exist
If we could just detect the signals or patterns in the markets, then we could achieve superior returns. Right? Sorry, no, this is wrong. We are wired to look for patterns that don’t exist. The even bigger problem is that we don’t have a way to detect real trends from noise. That’s where the gurus come in, I guess.
Most of you have seen some version of a Randomness of Returns or “Periodic Table” chart, pictured here:
In review meetings, we often show this type chart with a client’s own portfolio as one of the asset categories. The point this demonstrates is that most of the time, a globally diversified portfolio will neither be on the top or on the bottom, in performance terms, during any given year.
There are always multiple lessons from looking at these “Periodic Table” type charts. First, these scream out about how difficult, ok, silly, it is to think that anyone can predict which category will be at the top in any particular year. The best-performing asset class in 2017 (Emerging Markets) was in the middle of the pack in 2016 and next to the bottom the year before that.
Must Commit for the Long Term
Another lesson is that the long-term returns will likely not be too surprising, but the short term might be very surprising. What constitutes long-term in this context? 10 years or more would be my answer. Anything less than five years is just noise. You have to become “comfortable being uncomfortable” to withstand the surprises along the way. That’s where the human behavior I mentioned comes into play.
Even with randomness, there can be periods that appear to have patterns. I often use the example of tossing a coin. If we filled up Williams Brice Stadium at U.S.C. and had everyone toss a coin ten times and record the answer, would we notice some patterns? Yes. We would expect about 78 people in the stadium (of about 80,250 people) would toss ten heads or ten tails in a row. While this is actually random, we see a pattern. We believe that these people may be coin tossing gurus!
Okay. If you can accept the random nature of short-term market results, you have a fighting chance to actually influence outcomes in a way that is superior to the grand majority of other humans inhabiting the planet.
3 Niches Advisors Should Consider
When to Stop Investing in Prospects
Understanding the Principle of Least Privilege in Cybersecurity
Reach, Engage, and Earn The Female Dollar
Do You Argue with Your Spouse About Money? Read This!
3 Mining Stocks for Investors Seeking Gold Exposure
How to Be the Bearer of Bad News
How Effective Is Technology in the Realm of Personal Finance?
11 Laws of Trading to Win on Wall Street and Main Street
Why People Say So Many Things Are Common Sense Then Ignore It
Research17 hours ago
Trump’s Trade War Is Good for These 3 Dividend Stocks
Development17 hours ago
The Truth About Getting to the Next Level as an Advisor
Building Smarter Portfolios17 hours ago
Building the Case for Small Caps
Research2 days ago
Where Will We Get the Money to Pay for This Spending?
Human Performance2 days ago
You Are Your Ideal Client
Exit Planning3 days ago
How to Find and Retain Next-Level Management
Development4 days ago
How to Think like the Best Advisors in the Business
Research4 days ago
Reaction to Growing Number of Millionaires