Navy Adm. Grace Hopper, who is considered one of the greatest innovators of our time, once said, “The most dangerous phrase in the English language is, ‘We have always done it this way.’â€
A glass-half-full attitude may pay huge dividends, including lower risk of developing cardiovascular disease and other chronic ailments and a longer life. In an article published in JAMA Network, researchers found that study participants who rated highly in optimism were much less likely to suffer from heart attacks or other cardiovascular events and had a lower mortality rate than pessimistic participants.
Another research article, published in the Proceedings of the National Academy of Sciences (PNAS), indicates that people with higher levels of optimism lived longer. Optimistic women had a 50% greater chance of surviving to age 85, and optimistic men had a 70% greater chance.
Tips to take away: Believe it or not, optimism is a trait that anyone can develop. Studies have shown people are able to adopt a more optimistic mindset with very simple, low-cost exercises, starting with consciously reframing every situation in a positive light. Over time, your brain is essentially rewired to think positively. Since negativity is contagious, it is also important to surround yourself with optimistic people and consider a break from the news. For more on how to cultivate optimism in your life, check out the six specific tips in this report.
When I hear those words, it reminds me of the story about the young entrepreneur named Reed Hastings. Twenty years ago, he mustered the courage to pitch a potential merger between his fledgling company, Netflix, and mega-movie behemoth Blockbuster. His proposal: Team up to build a better online platform and keep both businesses growing into the future.
Blockbuster passed on the deal, claiming it did not fit their model and would only appeal to a small niche at best. The rest would become history, as Blockbuster filed for bankruptcy in 2010, and Netflix is now valued at $187 billion with 183 million subscribers.
Load Error
Other companies have faced similar fates because they focused more on continuing what they had always done, rather than ways to adapt with the times. Change can be scary and often requires you to step outside your comfort zone. But doing things the same way just to avoid the fear of change, can cause you to stagnate and miss new opportunities that may offer a better way.Â
Times have changed for retirement savers, too
The financial industry has changed over time as well. Factors now impacting our markets did not even exist when traditional investing methods, such as asset allocation, diversification and buy-and-hold, were first introduced. Globalization, innovation and technology have made the stock market, and investors, more vulnerable than ever. Popular strategies that originated over 60 years ago were never designed to defend against the so-called “black swan†event (economic bubble, financial collapse or a worldwide pandemic) that can appear without warning and inflict devastation on a portfolio.
We live in a new reality — with new challenges — requiring new solutions. But while many high-net-worth investors, institutions and pension plans have upgraded their investing approach to align with the times, the financial industry has opted to continue promoting the same old strategies to everyday investors. In some circumstances, these have the potential to do more harm than good.
Old Ways were not created for the New Days
For example:
Diversification may no longer be the best remedy to protect against loss.
Gallery: 8 Investing Lessons Learned In 2020 (Kiplinger)
While there are still several weeks left before we usher out the year 2020, there is no question that it has been one of the most challenging years in history. The global COVID-19 pandemic has impacted the lives of people around the globe. The health challenges, deaths and overall disruption to our daily lives is unprecedented. There has also been civil unrest and a major political divide across the country not seen since the 1960s.
The stock market has also experienced a roller-coaster ride. This year investors have been through some of the most volatile trading sessions ever, as well as the shortest bear market in U.S. history.
These trying times are an opportunity for serious introspection. Below are some investing lessons that I’ve learned in 2020.
1. Emotional decisions derail your finances
At the start of this year many investors expressed unbridled exuberance as the markets reached new highs on a regular basis. The fact that stocks also go down, or fluctuate in value, was not on the minds of most people. This led many investors to take on more risk than they could handle.
When the market went into a free fall in March, panic set in and clients called me asking if they should move to cash, shift around their allocation or even get out of stocks altogether. Thankfully, after having conversations with the nervous clients, none of them made any rash decisions.
A few weeks after the drop, the market began to recover its massive losses. Not wanting to miss out on the market surge, clients again began to call me. This time they asked why they didn’t own more stocks. This Jekyll and Hyde change in attitude may seem illogical in retrospect. However, when living in the moment, it’s easy to get caught up in the emotions of the day.
Implementing strategies to manage emotions and the actions you take is imperative.
2. The importance of bonds
In this ultra-low interest rate environment, high-quality bonds still serve an important purpose in most investors’ portfolios. This lesson was reinforced after the market plummeted. Owning high-quality fixed income provided a psychological benefit by minimizing volatility, which helped investors keep their emotions in check. It also gave investors a buffer from which to withdraw money if their income was reduced due to the state of the economy. Since bonds fluctuate much less than equities, they could sell a bond, instead of their stocks at steep losses, to help make ends meet.
Finally, bonds also provide attractive rebalancing opportunities that may improve one’s return over time. All these factors helped keep investors on track toward achieving their financial goals despite the tumult in the markets.
A simple diversified portfolio with just 60% in U.S. large cap stocks and 40% in investment grade bonds would be down a more modest 7%. Minimizing volatility also reduces panic selling, which is one way to help all investors stay the course.
4. The markets are unpredictable in the short-term
The market rallied significantly in the two days prior to Election Day, even as the country braced for protests due to the results of the presidential election. The S&P 500 was up 1.23% on Nov. 2, 1.78% on Nov. 3 and even rose 2.20% on Nov. 4, the day after the election despite not having a clear winner. Many market observers would expect this extreme level of unease and uncertainty to cause the market to fall, but it did the opposite.
According to Fidelity, from Jan. 1, 1980, through Aug. 31, 2020, if you missed only the best five days in the market your performance would be 38% lower for the time frame. It’s far better to focus on developing a strategy that you can stick with over the long run than trying to predict what the market will do on a day to day basis.
5. Selectively doing nothing may be a prudent strategy
Many investors have the urge to tinker with their investments. This is especially true when the markets are choppy. Watching their holdings gyrate widely in value can make anyone uneasy. That helpless feeling causes many to want to trade more frequently or make portfolio tweaks. However, sitting on your hands and not doing anything is usually the best approach.
During turbulent times, it’s crucial to avoid the big mistakes. Usually those missteps stem from doing too much, not doing too little.
6. Bad times present great opportunities
Warren Buffett put it best when he said, “be fearful when others are greedy, and greedy when others are fearful.†As the markets took a dive, I told clients with long-term time horizons and available cash that it was a great time to buy more stocks. The act of investing more money after seeing your portfolio drop so dramatically is very difficult. The comments I kept receiving included, “Why add money to something that keeps dropping in value?†and “Shouldn’t we cut our losses and move to cash?â€
While every fiber of your being is telling you to run for the hills, reaffirming your strategy by adding money is generally the best decision when markets are in a selling frenzy.
7. Picking the perfect time to invest is an imperfect strategy
I had a couple start investing with me earlier this year. The husband’s IRA transferred in first, and we started investing it immediately at the end of February. The wife’s assets transferred in a few weeks later, and we started investing her money at the end of March. The husband’s performance this year is flat because he started investing right before the market crashed. On the other hand, the wife started investing at the bottom right before the market started its dramatic ascent. She’s up significantly at the end of November.
The fact is, investors should understand that the timing of when they start investing is mostly luck. For example, many Baby Boomers entered the workforce and started investing in the early ’80s right before one of the greatest bull markets in history. Conversely, many Gen Xers entered the job market in 2000 as the tech bubble imploded.
A common idiom for successful investing is, “It’s time in the market, not timing the market.†Instead of focusing on the ideal time to start, which is mostly out of our hands anyway, just jump in by establishing a disciplined process to invest and adding money over time. Even if the market doesn’t always cooperate, with the right process you can still build a meaningful nest egg and achieve your financial goals.
8. As bad as things are, they can always get worse
If 2020 had T-shirts, this would be the slogan printed on the front. It’s a good general lesson when it comes to the markets, as well.
When the market dropped early in March, several clients added money to their portfolios. Little did they know that the market had a long way to fall before its March 23 bottom. On March 16, alone, the S&P 500 dropped 11.98% in a single day. The fact that things can continue to deteriorate much longer than an investor anticipates is nothing new in the world of investing. For example, if you had invested in the energy sector in October 2005, and stuck with it through October of this year, you would have lost money. You also would have lost over 47% year-to-date as of this writing.
There is no guarantee an investment will bounce back even after 15 years. That’s why it’s imperative to stay globally diversified, and never put all your eggs in one basket, no matter how certain you are about any opportunity.
One bonus life lesson: Be positive
If there is one key message from this year, it’s to always stay optimistic. While much of the world went into lockdown for a good portion of the year, business and life managed to continue. Americans’ ability to adapt to a new “work-from-home†reality, aided by video conferencing software such as Zoom, made that possible despite the challenges.
In that vein, it’s important to never discount human resiliency and American ingenuity. Through every crisis, new successes have emerged. General Electric was launched in 1892 by Thomas Edison as the nation was heading into the Panic of 1893. In 1929, Disney emerged during the Great Depression. Hewlett-Packard was founded in 1939 right after the recession of 1937–1938, when GDP declined by approximately 19%. Fred Smith started FedEx at the end of the 1969-1970 recession, when many companies were hesitant about spending money on new products and services. The worst of times is often when the entrepreneurial spirit is most creative.
In his 2005 commencement address at Stanford University, Steve Jobs said, “You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.â€
People will be reflecting on the year 2020 for decades to come. However, I believe folks need to trust that with a positive outlook, we will become better people and more prudent investors because of the challenges we faced over the past year.
Disclaimer: Keep in mind that diversification does not guarantee a profit or protect against a loss. This article was authored by Jonathan Shenkman, a financial adviser at Oppenheimer & Co. The information set forth herein has been derived from sources believed to be reliable and does not purport to be a complete analysis of market segments discussed. Opinions expressed herein are subject to change without notice. Oppenheimer & Co. does not provide legal or tax advice. Opinions expressed are not intended to be a forecast of future events, a guarantee of future results, and investment advice. The Standard and Poor’s (S&P) 500 Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization U.S. stocks. Individuals cannot invest directly in an index. Adtrax #: Item 3347128.1
10/10 SLIDES
Asset allocation and diversification are based on the idea that you will assemble a portfolio with investments that, in an ideal world, will perform differently from one another through various market conditions to help balance risk over time.
But unfortunately, we don’t live in an ideal world. In recent market history (since the 2008 financial crisis), ongoing correlation has increased between asset classes. This means that instead moving away from each other as intended, different investments may become more aligned and move in tandem. Market history has shown this occurrence becomes even more likely during times of decline. Then, once the market sell-off subsides and volatility returns to normal levels, these investments begin to move against each other as originally intended. In other words, the protection features expected from diversification may actually be weakest when needed most, during decline, only to then impede the potential for growth once the recovery phase begins.
Buy-and-hold does not address the full picture for making money.
Warren Buffett once said, “Our favorite stock holding period is forever.†However, it can be argued this buy-and-hold philosophy is a passive approach that only addresses one side of the equation. It provides offense, while ignoring defense. It implies that risk is something that must be accepted rather than controlled. It refuses to adjust as markets change and prefers to rely on long-term potential while disregarding short-term trends.
“More risk, more reward†is a myth.
Economic theory (and conventional wisdom) has long suggested that taking more risk is, on average, rewarded with a higher return. In other words, if you’re willing to take the chance, the occasional big winner will offset your other losses. But this assumption has been disproved time and again with the emergence of new studies, strategies and investing options. Updated methods have proved the opposite to be true; and I personally know many investors who have been able to increase reward while simultaneously decreasing risk. Investing is a journey, and it’s important to remember that in the end, your success will be determined by what you made in good times, and kept during declines.
The No. 1 statement I hear the most when updating a client’s investing approach from old to new is, “I always thought I should be doing something different; I just never knew what else I could do.â€
Unfortunately, I believe those working in the financial industry are often more focused on getting your money rather than growing your money. And they know the best way to accomplish this is by keeping you in your comfort zone, by encouraging you to continue doing the same things you’ve always done, rather than trying to fight your fear of change.
But if you think back over time, there’s a pretty good chance the decisions that had the biggest impact on your life were also the ones that made you the most uncomfortable at the time. Like the first time you approached your future spouse, when you bought your first home or took a new job.
We live in a new reality where economic activity is unlike anything investors have ever experienced. A paradigm shift has transferred influence from man-to-machine and Wall Street-to-Main Street as the stock market has evolved. You are at a critical point when you must decide: Should you continue doing what you have always done, or be open to something new?
3 ways to modernize your investment approach
To help you upgrade your investing process, here are three strategies to consider:
Rather than buy-and-hold, consider an approach designed to buy-and-adapt. Active methods like trend-following, adaptive-investing, and sector-rotation are designed to adjust as markets change, to increase positions of strength and reduce those of weakness.
Diversify in a new way using a mix of different investment strategies rather than investment classes. Actively managed ETFs provide an array of updated strategies such as market-neutral, low-volatility, hedged, momentum, anti-beta, long-short and niche-based opportunities like innovation and online services.
Invest in change by allocating a portion of your portfolio into options designed to profit from advancements in technology and innovation. Two examples of this approach include “Thematic†and “Disruptive†funds. Thematic funds seek out companies tied to a specific theme or niche that is growing in popularity with the ability to rotate from one to the next as momentum moves into new areas. Disruptive investing focuses on ground-level innovation that has the potential to change the way we live, such as electronic vehicles, “genomics†or advancements in DNA research, and cloud-based services to name a few.
After reading this, you may have a desire to upgrade your approach but just don’t have the time (or inclination) to stay on top of your investing as things continue to change. If this is the case, try to find someone who will do it for you. There is a new breed of advisers who have abandoned traditional methods to embrace a modernized approach with new opportunities.
Consider looking beyond the mainstream, past those financial professionals who sound like everyone else and rehash the same old methods, over and over. In today’s rapidly changing economic environment, it’s important to work with someone who is knowledgeable of ongoing changes and able to properly adapt and address updated factors with the new opportunities.Â
Kim Franke-Folstad contributed to this article.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. Investing involves risk including loss of principal. Advisory services offered through Enhance Wealth, a Member of Advisory Services Network, LLC.
