Returning to Earth
DIS and DAT - Returning to Earth - August 2021
Our periodic communication that reminds you to ask, “Should I react to those headlines?”
“Most of American life consists of driving somewhere and then returning home, wondering why the hell you went.” John Updike
A recent Jason Zweig article titled “When a 59% Annual Return Just Isn’t Enough” in the Wall Street Journal caught my attention. The author referenced a small survey where 750 U.S. individual investors expected to earn 17.3% this year, after inflation.
If you have read our Dis and Dat’s very long, you know that we believe price predictions are worthless to a true investor. You will also know that a lot of investors determine their future expectations based on recent past price performance. It will probably not surprise you to hear that last year the sp500 had a return of 18.4%.
On October 16th, 2008 Warren Buffett wrote an Article in New York Times, titled “Buy American. I Am”. He was writing about the gloomy outlook for stocks, and how people who hold cash feel comfortable.
For our own sanity, let’s review the reality of returns currently available in the beginning of July 2021:
Earnings yield of the SP 500 2.51% https://ycharts.com/indicators/sp_500_earnings_yield
Ten year us treasury yield 1.44% https://ycharts.com/indicators/10_year_treasury_rate
30 yr mortgage rate 3.02% https://ycharts.com/indicators/30_year_mortgage_rate
12 month us inflation rate 4.99% https://ycharts.com/indicators/us_inflation_rate
And one more reality, it’s not likely that those individual investors who participated in the study are all above average investors. According to past Dalbar studies investors have a tough time even keeping up with inflation on average.
Suffice it to say it is highly likely that these investors expectations for their future investment results are too high.
What can we do to avoid drinking the Kool-Aid ?
The first item that I would tackle is mindset adjustment. Amateur investors tend to believe that investing is only about “smarts”. Naturally after a good period of investment returns, they begin to label themselves as “smart”. This, however, can be a faulty and dangerous mindset. More of the old, surviving investors refer to successful investing as having more of a patience requirement. I prefer to take instructions from the old surviving investors.
As investors we want to avoid predicting future returns. Predicting future returns fall more under the gambler or speculator’s job responsibilities. I am not trying to predict future returns here. I am sharing that it is my experience average investors have alternated between optimism and pessimism. If we want to behave as investors, we should avoid these high expectations.
WHY, what harm could come from such a popular activity, one may ask?
My belief is that expectations this high can distort the view of RISK. It can make novice investors believe there is no risk; And taking risk too lightly can be a deadly investment experience.
Focus instead on the realistic risk and returns of investing. Focus on YOUR unique situation. Tune out the noise of speculators, gamblers, and those media outlets who receive their ad revenue from such sources.
As investors, we must patiently wait for speculators and gamblers’ return to earth. Instead of joining their ranks, we can review the last point of our investor’s mindset
https://fluxconsole.com/files/item/422/74994/Important%20Investment%20Reminders.pdf
We are not seeking outperformance of all investments at all times. If a popular momentum-driven pricing environment in any area of investments occurs, underperformance of that area is expected.
Thanks for your attention, and
I hope this helps. Be safe,
James
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Advisor.Investments [“AI”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from AI. Please remember that if you are a AI client, it remains your responsibility to advise AI, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. AI is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the AI’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: AI does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to AI’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
