Quote for the Week

Those wonderful statistics on long-term returns are what the market did, not what any single individual or fund did, or would do, if history replayed itself. In my real-world experience, investors with smaller allocations to stocks and with some anchors to windward have been the ones most likely to be the winners over the long haul. The crucial element of success is the ability to make decisions without freezing up or slamming the panic button. In bear markets, the muted volatility and the contractual safety of bonds provide the most congenial environment for arriving at rational decisions about stocks. In bull markets, the balanced portfolio may not make for lively cocktail-party conversation, but with 60 percent in stocks, your wealth will still be participating and growing.

I cannot overemphasize the importance of this last point. Few decisions in life motivated by greed ever have happy outcomes. Unless you are that rarest of birds, someone who is cool under the rapid-fire, high-pressure decision making required to maximize your returns, let others take such risks, and allow your portfolio to plug along at a slower speed. In investing, tortoises tend to win far more often than hares over the turns of the market cycle (and, as we have recently been reminded, markets still do have cycles). — Peter Bernstein (source)

Continue Reading…

Quote for the Week

After a stock market decline, people may perceive more risk than before when, in fact, the decline may have taken some of the risk out of the market. I haven’t quantified this, but I believe risk perceptions probably move around more than risk preferences do. — Robert Shiller (source)

Continue Reading…

The first quarter of 2023 shows how far markets can swing in such a short time. In fact, double-digit moves in a single month are common even for market indexes. But how you react to those moves matters.

Unexpected events in March are a perfect example. Concerns about the health of a bank had a cascading effect. News of depositor withdrawals at Silicon Valley Bank set off further withdrawals, and finally a rush for the exits. The bank failed because depositors panicked.

Of course, that news tanked the bank’s stock, set off rumors of other banks at risk, and the financial sector dropped 14% in two weeks and a 10% loss in March.

The episode is a lesson in itself. People make up markets. A shift in their emotions moves markets. The most important part of investing is keeping your cool when the markets get crazy because emotions often undermine long-term returns.

A note before getting to the 2023 numbers. The asset class, sector, international markets, and emerging market return quilts are up-to-date with the first quarter returns. Hit the links for each one. Continue Reading…

Quote for the Week

Hindsight occurs when a surprising event takes place and the surprise is very brief, replaced almost immediately by a need to make sense of it. The individual has learned something from the event. For example, if there were two football teams that you considered equally-matched, and one of them trumps the other 5-0, they are no longer equally strong in your mind. One of them is clearly better than the other. This makes sense of their victory. It also makes it virtually impossible for you to re-construct that, earlier, you thought they were equal.

Now, we think that the team that actually won “had to win.” Why did it have to win? Because it won. It won because it was stronger. How do we know it is stronger? Because it won. This is hindsight. It has a huge effect on our thinking, it has a huge effect on investing behaviour, and it has a very pernicious effect, in that it teaches us something quite wrong about the nature of reality…

So, the pernicious effect of hindsight is that we get the sense, after the fact, that an event was predictable, so we get the sense that the world is predictable. We think the world makes sense, and that exaggeration of the coherence, consistency and predictability of the world means that we deny the real uncertainty with which we are faced in existence. And this denial of uncertainty in turn produces irrational action. — Daniel Kahneman (source)

Continue Reading…