As we look back at the 2019 stock market performance, what lessons can we take with us into 2020 and beyond? In January of 2019, many investors were anticipating a recession, and unfortunately some investors followed their “gut” and sold stock, expecting the December 2018 stock market decline to continue. The S&P 500 declined 7.18%, including reinvested dividends, from November 1, 2018, to December 31, 2018. Despite investors’ worst fears, the S&P 500 gained 31.49%, including reinvested dividends, from December 31, 2018, to December 31, 2019.
The number one lesson from the stock market gains of 2019 is that the market doesn’t care what your “gut” or anyone else is telling you will happen to stock prices in the next month, or even the next five years. The 2019 stock market taught us that a successful investment experience is not about “timing” the market, but it is about “time in” the market. A successful investment strategy starts with buying and holding stocks for long periods of time. Nobody has a crystal ball, and if anyone proclaims to have the insight to predict the timing of future price movements in the stock market, this is your first clue to seek a second opinion.
Markets Are Efficient
Embrace market pricing and experience long-term returns. Market prices reflect all available information regarding any publicly traded security. It only takes a few buyers and sellers to arrive at a fair price. Market commentators often report a “sell-off” in the market, giving the impression that there are more sells happening than buys. Remember that there are two sides to every transaction. There is no sale without a buy, and vice versa. When you feel enticed to sell or buy securities because it is good timing, ask yourself, “Who is on the other side of this transaction?” or “Who is buying when everyone around me is selling?” Don’t try to outguess the market. Resist chasing after money managers and funds that boast winning track records, while attempting to beat their benchmark index.
Let the markets work for you! Invest in a diversified portfolio of all publicly available stocks for the long run, and set aside short-term cash needs of five to ten years in a portfolio of high–credit quality, short-duration bonds. This is easier said than done. Why? It comes down to managing your emotions. The fear of loss and the allure of beating the odds are just two emotional responses that lead to poor investment decisions. When you manage your emotions, you will not only have better investment returns, but you will also have a better investment experience.
A Better Way to Invest
This month, I presented at the monthly East Idaho Estate Planning Council meeting. I focused my comments on how to pursue a better investment experience. After discussing the “do’s and don’ts” of investing, I opened it up to questions. I found it interesting that the conversation was dominated by one topic: “How can professionals who are fiduciaries to their clients protect them from either their own flawed investment strategies or the bad investment advice they are often sold?” In other words, these professionals recognized “advisor risk” or “advice risk” as one of the greatest risks to their client’s investment experience. I couldn’t agree more!
Trust but Verify
I was impressed with many of the recommendations we discussed. One participant suggested that everyone should ask how the advisor is getting paid so the investor can better understand the potential motivations behind the advice they are receiving. Another suggested that every investor should seek advice from multiple professionals before making investment decisions. A third professional explained that as an investor ages, it is important to include loved ones in the investment decision process. Consider the following investment rules as you pursue a better investment experience:
• always use an independent third-party custodian,
• always verify that your fees and commissions are correct, and
• always avoid complex investment contracts that you do not understand.
If an investment seems too good to be true, trust me, it is. It is always a good idea to obtain a second opinion as you evaluate your investment options. Your CPA or attorney can provide you with an independent voice as you search for objective investment advice.
Aaron B. Sautter is a financial advisor with Onyx Financial Advisors, LLC, an independent, fee-only registered investment advisor firm located in Idaho Falls, Idaho. He can be reached at (208) 522-6400 or at www.OnyxFinancial.com.