With everything going on in the world right now — protests, war, and floundering economic systems — it’s natural for even the most confident investors to have doubts. Our best plans are still based on certain rules and assumptions, and our own lived experience shades our perspective more than we probably realize. So when the world suddenly seems out of control and beyond our comfort zone, things we formerly took for granted feel a lot less stable. Like walking a lonely road with no idea what is over the horizon, it can be a unsettling experience.
Now I certainly don’t have the answers to every problem in the world. But when it comes to investing, the good news is that you actually don’t need those answers to protect yourself. The cool thing about studying financial history is that no matter how crazy things feel today it probably pales in comparison to events that your parents and grandparents dealt with. And by understanding how certain portfolios handled those stress tests, we can choose one more likely to stand the test of time.
So if you’re watching the news and worried about what it means to your important financial goals, here are a few tips for setting your portfolio up for success no matter what happens.
It was a beautiful, warm, sunny day without a cloud in the sky, and I took full advantage by going on a walk downtown and over the river to my favorite hill to sit and enjoy the view of the skyline. The scene was a welcome break from the stress that filled my life recently, as family issues were weighing heavily on my mind. But eventually an urgent text beckoned me, so I grabbed one of the many nearby scooters that fill urban settings these days. And off I went, the sun on my back and wind in my face, zipping through the bustling streets on my way home.
Familiar surroundings and pressing anxiety make for interesting bedfellows. On the one hand, I was in my comfort zone on a picturesque day. And on the other, my mind was racing to where I was needed most and the scooter kept a similar pace. A passing jogger here. A left turn there. And then boom. Maybe it was a bump in the road or a hair trigger accelerator — I honestly don’t remember. But the end result was a collision with an immovable concrete wall at an alarmingly high speed.
That was the last time I walked without crutches.
As an engineer by training, I’ve always been comfortable with the use of historical numbers in decision making. From empirically tested yield strengths that inform design specifications to segmented sales numbers that inspire new product ideas, making wise choices is all about putting good data to productive use. And as one can see by perusing the deep data focus of Portfolio Charts, I naturally apply that same mindset to investing.
So one of the things I admit I’ve had to adjust to over the years is something that I never really experienced in my engineering career. When it comes to finance, some people are just really dismissive of historical data.
It’s common in some circles for people to quickly shut down any discussion of past returns as the foolish discussion of unrepeatable events. Some reflexively point to specific timeframes that surely skewed the numbers in deceptive ways. Others explain how current events are very different than the past and proclaim that the old results are ancient history. And a surprising number have developed an outright distrust of math and statistics as the tools of unsophisticated investors and financial snake oil salesmen.
To be fair, these opinions are often born of legitimate examples of data abuse. Lots of people misuse statistics all the time or naively apply them out of context, and I totally understand how backtesting gets a bad name. But in my experience, the problem is not with backtesting but with backtesters. It’s super valuable when done correctly, but you have to know what you’re doing and approach it in the right way.
So to cut through the financial cynicism, I’d like to share three short stories about real-world situations where the use of historical data is widely accepted. By exploring how data is used well, perhaps we can learn a thing or two about how to also apply it effectively it in our personal portfolio decisions.
A loved one passed away recently, leaving the rest of the family scrambling to deal with all of the things nobody is ever truly prepared for — funerals, estates, and caring for other family members affected by the loss. Everyone gets their turn eventually, but you’re never truly ready. It just happens, and you’re thrown in the deep end to sink or swim.
This particular family member had a lot of pets, and one of the responsibilities that fell on my brother and me was the job of rounding them up and taking them to a local adoption center to help them find new homes. Dealing with cute cuddly animals surely was more joyful than coping with the hard realities of death, so we happily took the job. Arriving at the home with a sense of purpose, we opened the door expecting a gaggle of furry creatures excited to be held and fed.
The dogs were naturally suspicious at first, but once the food came out they softened up and were as sweet as can be. A few belly rubs and a short ride later, and they were well cared for and ready for adoption.
And then there were the cats.
The emotional rollercoaster that we all know as 2020 is finally coming to an end, and reflecting on everything that happened I thought it might be interesting to roll up my sleeves and do some serious number crunching. Amid all of the newsworthy events of the past year, the wild financial ride certainly made for an interesting experience for diligent investors. So how did the various portfolios perform over such a volatile financial timeframe? What did the best? What did the worst? And what happened when sterile portfolio theory ran head-first into the brutal COVID-reinforced wall and left bruised investors looking for quick relief from the pain? Let’s jump right in and find out!
I first wrote this post three years ago, but it’s one I personally think of often. With all of the stress, struggles, highs, and lows that have been unavoidable facts of life in 2020, I feel compelled to share an old but refreshing perspective that feels appropriate in the moment. Think of it as familiar comfort food for tired financial minds.
Happy Thanksgiving! My sincere hope is that you have much to be thankful for.
Between spooky Halloween decorations, the predictable election anxiety, and a touch of understandable Covid fatigue, is seems fear is on the minds of investors these days. I’ve noticed a distinct uptick in nervous takes from stressed investors worried about everything from low interest rates to high valuations. While families with enough savings and job security to weather the lockdown storm are doing pretty well in the grand scheme of things, the thing about fear is that it’s flexible.
No matter who you are or how confident you feel, I can guarantee you have a pain point tucked away that scares the living daylights out of you. Maybe it’s spiders, heights, or rejection. Or yes, financial loss that delays your retirement or destroys your life goals. Nobody is immune. And many people seem to be sharing concerns that stocks and bonds are about to fall apart and drag their life savings into the dark financial abyss.
But make no mistake — those fears are often quite legitimate! The doomsday analysts may be completely right about the prospects for different assets. Markets shift all the time, and the question is not if but when stocks and bonds give up the ghost. So knowing that the grim financial reaper may be right around the next corner, there are at least three different options for tackling the dreaded unknown.
I’m a big fan of asset allocation. Rather than slaving over daily market news to chase fleeting profits and avoid unpredictable losses, smart investors can create an intelligently constructed portfolio that grows and protects their hard-earned money with low stress and minimum effort. Like following a simple recipe to bake a cake from scratch, all you have to do is purchase a handful of low-cost ingredients, combine them in the right proportions, and let chemistry, heat, and time do all the work. Simple but sophisticated portfolio ideas designed by some of the best minds in the business can help you meet your important life goals while freeing you to focus your own energy on the things in life that truly matter. And with just a small amount of coaching, anyone can do it!
What’s not to like?
Well, to be honest there is one thing that has always sorta rubbed me the wrong way. It’s not a problem with the strategy itself, but an inherent communication issue dripping in bias that I believe subtly chases off a lot of people new to the concept. Asset allocation has a marketing problem, and it all comes down to terminology.
I don’t know about you, but the last few months have been some of the wildest and most newsworthy I can remember. From a global pandemic and ongoing social unrest on one end to an incredibly inspiring SpaceX launch and emerging hope for a better world on the other, the roller-coaster of emotions has been all over the map. It’s unpredictable, intense, and at times utterly exhausting.
And the markets have clearly mirrored that crazy ride. It seems like only yesterday that I was writing an article cataloging one of the single worst months to invest on record, but the market has since roared back far faster than even the most optimistic investors expected. That encouraging development seems to have changed investing mindsets a bit, spurring a curious reader to pose an interesting forward-looking question:
What are the portfolios that tend to do better after a crisis?
While I don’t have a functioning crystal ball, I do have a ton of historical data at my fingertips. So let’s dig in and see what we can learn about portfolio recoveries.
In July of this year NASA is planning to launch the next mission in their ongoing series of journeys to Mars. Named Perseverance, the robotic explorer is built on the successful design of the Curiosity rover that has been wandering the Red Planet since 2012. A machine capable of long-term exploration of another planet is a true engineering marvel, but controlling it remotely is not even the hard part. After decades of practice, even the requirements of launching devices out of the pull of Earth’s gravity are pretty well-known. But do you know what is still a real challenge even for the best rocket scientists?
Sticking the landing.