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Money

Keep It In Perspective!

Yesterday, the stock market took a plunge, with the S&P dropping 3.53%. My friend Greg, who started the investing discussion group I am a part of (you can visit our website here if you like), sent an email to our group with two pictures, the one above and this one:

Let’s examine these a bit.

Notice that both images are a graph of the S&P 500 Index, which is a collection of the 500 biggest companies in the U.S. They also both show where the S&P was after yesterday’s commotion; that is, it was at 3,271.03, having lost 119.65 points, or 3.53% like I said.

With me so far?

That’s where the similarities end. The first graph shows a market meltdown in a dramatic red line. In a matter of hours, the index went from 3,390 down to 3,271. Ouch! As my friend wrote, “Panic?”

The second graph shows much greener pastures… literally. Here we see the arc of what the S&P did all year long. Yes, there was a fairly precipitous drop way back in March, but since then it’s basically been a steady climb. Yesterday’s going-ons are barely visible at the end of the chart. And despite early year dramatics, the index is up 14 points on the year. While this might not excite your dreams of being independently wealthy anytime soon, on the other hand it doesn’t make you want to watch for falling objects every time you go outside.

Up 14 points on the year VERSUS “the sky is falling.

Which do you prefer?

It’s all a matter of perspective.

You can experience the short-term present-moment chaos of a day like yesterday and think that’s what investing is: completely chaotic, unpredictable, unstable, scary. Or you can see the big-picture, which really can be a lot more relaxed, since the trend is looking up (which you see in the second graph starting the end of March).

As investors, we aim to keep a long-term focus. Yet as people with our delicate, survival-based brains, we can get easily triggered by the uncertainty of the moment.  That is the real test for investors, because it only takes one moment of fear-induced blindness for someone to make a mistake that messes up their investing life.

In his short (and free!) e-book “If You Can,” William Bernstein makes a clear and concise case for how people can be successful as investors. As he writes,

Start by saving 15 percent of your salary at age 25* [… ] Put equal amounts of that 15 percent into just three mutual funds

A U.S. total stock market index fund

An international total stock market index fund

A U.S. total bond market index fund.

Over time, the three funds will grow at different rates, so once per year, you’ll adjust their amounts so that they’re again equal […]

That’s it; if you can follow this simple recipe throughout your working career, you will almost certainly beat out most professional investors.

Sounds easy, but here’s the rub:

…the most important word in this entire booklet is the

IF

in the above “if you can follow this simple recipe,” because, you see, it’s a very, very big if.

Bernstein then goes on to detail five different hurdles that most investors face (and often unsuccessfully). To paraphrase using my own words, these hurdles are:

  • Not Saving Enough
  • Not Understanding How Finances and Investing Work
  • Not Having a Sense For Historical Financial Trends
  • Making Stupid Behavioral Mistakes
  • Pay Excessive Fees, ie, Giving Up Your Money to the Financial Industry

Personally, I feel that I am doing pretty well as an investor so far. In this my sixth year, I can now say that I have handled a bear market with aplomb! Yet as a human being, with a human being’s brain, I will never take for granted the ability to think clearly and act correctly for my long-term good.

There is nothing more important than keeping perspective!

*Please don’t feel bad if you didn’t start doing this at age 25. I didn’t either.

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