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Give Your Investments Time

Published in Articles on November 13, 2024

As we start the fourth quarter of 2024, there is no shortage of predictions about the future of the economy and stock market. We live in a changing world full of uncertainty and surprises that no one can predict. A quick look at the last 100 years reveals astounding changes in technology, medicine, and politics; however, this look back also emphasizes the effects of greed and fear just as we see today.

When faced with uncertainty about the future, people are easily persuaded by relationships with friends and family, the allure of risk, and the desire for both security and reward. People continue to seek the secrets of a happy life and look for certainty when none exists. Change captures our attention because it is surprising and exciting, while history’s most powerful lessons are the things that never change and often go undetected. Unchanging behaviors preview what to expect in the future. There are timeless lessons from human behaviors that don’t rely on chance, luck or accident.

Uncertainty surrounding the future of investments and retirement often leads to emotionally charged financial decisions. With speculation about interest rates, inflation, unemployment, and earnings, investors can be easily persuaded to believe the “so called” experts. A quick review of history teaches us that no one consistently makes correct predictions about the ever-changing components of the global economy.

Despite investors’ worst fears during this past year, the S&P 500 index has gained 20.45%, starting the year at 4,769.83, and reaching a new high of 5,745.37 at the time this article was written. Investors are left wondering what 2025 will bring. As you look to the future, consider that the greatest predictor of an investor’s long-term rate of return is not the ability to accurately predict changes in interest rates, inflation impacts or market movements. It’s whether investors can understand and avoid their own irrational behaviors and biases.

Many of our biases and mental shortcuts attempt to deal with uncertainty in the same way our ancestors dealt with the rustling noises in the bushes. A very common investor bias is aversion to loss. Emotionally, the pain of loss far outweighs the joy of an equivalent gain. This decision shortcut can lead to selling an investment during steep price declines for fear of loss.

Steep price declines will occur multiple times in a long-term investment. Although significant drops in the value of an investment are scary, they should be expected and incorporated into a long-term investment plan. Investors must expect and plan for price declines along the path to capturing long-term market returns.

The illusion of certainty convinces investors to believe that the results of their decisions are sure, and that chance has no influence on their investment results. This decision shortcut can seduce an investor into attempting to time investment buys and sells based on the predicted price movements of the stock market. Investors may mistakenly believe the results will be positive because they got it right last time.

Both skill and chance play a role in investment outcomes. Investors are forced to make decisions about an uncertain future and should consider the probability of potential investment outcomes. Equity investments are a volatile asset class in the short run yet produce superior returns in the long run. Buying and holding stock for more than five years has a much higher probability of success than attempting to outguess the market using short-term market timing strategies.

Define the investment game you are playing and make sure your actions are not being influenced by investors playing a different game. Then spend your time planning and thinking about the investment decisions and strategies that have the biggest impact on your life. The conditions of the economy and the market are never as good or as bad as they appear. There are entire industries making financial predictions designed to profit off the fear and greed of investors.

Investors would do well to avoid investment decisions that encourage extreme financial strategies. There is never one right answer for you and your family. There is only what works well for your specific goals and desires. Financial plans and strategies must allow you to sleep well at night, while adhering to basic financial principles. Any good financial plan starts by defining your goals.

Every investor should pick a strategy that focuses on goals and not beating the market. The most important ingredient in a long-term investment strategy is time. Time plays a crucial role in the positive effects of uninterrupted compounding returns. If you can meet all of your goals from capturing the benefits of uninterrupted compounding returns, then what is the point of trying to beat the market with any number of timing strategies. You can afford to not be the best investor, but you can’t afford to be a bad investor.

The decision to buy the total market and hold it for decades should be part of any successful financial plan. Keep your financial world simple and organized over long periods of time to optimize your financial independence. There is little correlation between investment effort and investment results. Your investment strategy shouldn’t rely on picking the right sector or timing the next recession. It should instead rely on a high savings rate, patience, and optimism that the global economy will create value over the next several decades.

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.

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