Marketwatch had what I would consider an important article that recapped some thoughts from Charlie Ellis. The big thing was having the correct objective with your investing. Long time readers might recall my talking about my primary goal of giving clients the best chance possible to have enough money when they need it. My idea on how to do that is to try to assess when market conditions give a good chance for growth and then going along for the ride and also assessing when market conditions urge for more caution than normal and then focus on protecting assets.
While there are obviously many participants who don't think of their investing goal as in terms of seeking to have enough I do think of that as being the overriding primary objective.
A point Ellis is making is that simply "beating the market" is not congruous with most people's actual objective; objective being defined as what their financial circumstance and psychological make up calls for. I have my own philosophy on things which is what I write about and incorporate into how I do my job. You no doubt have at least some thoughts on your own needs and ideas about how to get there and hopefully what you think you need versus what you really need line up with each other.
I know there will be a couple of comments from people who feel they must try to beat the market and probably just think I am wrong on this point which is fine for them up to a point. This incongruity does not have to have a bad outcome by any means but a misalignment increases the probability of a bad outcome.
To the extent having enough money when you need it is a logical objective the longer term portfolio math that goes along with avoiding large drawdowns is quite compelling and I would also add that people are less likely to panic if they don't have something panic about. That is a semi-snarky comment but the market occasionally cuts in half (twice in less than ten years would seem to be unusual) and it is in the heat of those large declines where people panic. If the full brunt of the decline can be avoided then chances are the emotional panic that goes with the full brunt can also be avoided.
That sort of focus is one way to add long term value over the long term as opposed to beating the market this quarter.
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9 comments:
Good post.
When my children periodically ask me for advice on investing, they probably know my first inquiry is this:
"Where can you cut spending?"
I think many folks who consider themselves investors really don't ask this question of themselves often enough. And this is where investors can obtain immediate, no risk returns.
T
Roger,
If you can not beat the market than I would be better off just buying S&P etf never follow the market save the 1% +/- you charge and just always wait everything out.
If you do not beat the market than this simple approach beats you by 1+% which would be large over time.
T makes a good point though
Sorry but can not always agree with you and your blog would be a lot more boring if we did :)
Anon, what is beating the market? Beating the market by 1% is an incredibly short sighted goal IMO. I used the following example in a post a couple of years ago;
2003 lag by 5%
2004 lag by 5%
2005 lag by 5%
2006 lag by 5%
2007 lag by 5%
2008 beat by 30% (from well timed defensive action)
that is a full stock market cycle, do the math, this result would come out way ahead over the course of the cycle.
To me, that's where the value add of an advisor SHOULD be.
Not in beating the market, but in helping you avoid the losses. Think of it as only caring about beating the market in down years or something like that.
This discussion reminds me of the quarterly investors letter Bill Nygren wrote on the recent 10th anniversary of his management of the Oakmark Fund. Over those 10 years, he noted, he had written 40 quarterly letters to investors. In just 8 of those letters, he notes, was he able to report positive quarterly returns while beating the performance of the S&P 500.
However, he noted, an investment in the S&P at the beginning of that period was worth 15% more after 10 years, while an investment in the Oakmark Fund would have given a return just under 80%. Once again, protection against the downside was the key to satisfactory returns.
When I set financial objectives, I first ask what it is I want want to accomplish with the money and when. Then I try to develop a plan which gives me the best chance of reaching that objective.
If I can accomplish that, I don't give a damn if I beat the market. I have what I want.
K
A little off topic, maybe, but does this environment (markets, dysfunctional governments, portfolio going nowhere but down, etc.) feel like 2008 to anyone else?
Roger,
RE your 7:48 comment. I ran the numbers and I believe your conclusion is incorrect. In the end the market has 100% of what the market returned. In your sequence of returns you would have 100.59% of what the market returned. The results are virtually identical. Factoring in taxes, which I always do since I'm >95% taxable, taking so called defensive action would have put a taxable investor behind.
How do you conclude defensive action puts you way ahead?
WH,
I may not fully understand your comment and I am not sure how you derived your numbers.
In 2003 SPX up 26%
2004 up 9%
2005 up 3%
2006 up 13%
2007 up 3%
2008 down 38%
Add 2% each year for dividends makes
2003 up 28%
2004 up 11%
2005 up 5%
2006 up 15%
2007 up 5%
2008 down 36%
in comparing a portfolio in the manner of my comment the year by year would be
2003 up 23%
2004 up 6%
2005 flat
2006 up 10%
2007 flat
2008 down 6%
In doing the math year by year I get a net result for $100,000 invested Dec 31 2002 into SPX being $115,289 so a 15% total return. I get the example gave to be worth $134,812 which is a total return of 34%.
I think that difference is meaningful but maybe it isn't?
How did you do the math? Did I miss something? Perhaps the example I gave was poorly thought out?
Roger,
Your math is indeed correct.
The difference is in my misunderstanding of the scenario's phrasing.
For example, the difference the first year is -21.74%, (23-28)/28 x 100% on a relative basis but 5% on an absolute basis.
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