The Mindful Money team. Photo: Karolina Zapolska

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We know — vividly — what has already happened. We can never know what will come next. The humble recognition of this truth should be the foundation of any long-term investment philosophy. The question is, “Given that we cannot know what comes next, how should we invest?” 

Being mindful of this limitation can help you become a better investor and can improve your investing experience.

Return envy

Sometimes, a small fraction of the investable universe starts getting lots of investor and media attention. Often a new technology (like electric vehicles, artificial intelligence, or software as a service) or a new investment product (like cryptocurrency, special purpose acquisition companies, or non-fungible tokens) captures the collective imagination. The growing attention attracts investors’ dollars, and folks begin overpaying — a little at first, and eventually a lot. The more folks are willing to overpay, the better these companies and their investors (often our neighbor or brother-in-law) appear to be doing, based on stock price and “returns” alone.

Our attention is then drawn to the huge returns our brother-in-law’s portfolio is experiencing that our own diversified portfolio is not experiencing. Feelings of jealousy and missing out move us to sell the holdings in our portfolio that have not been working lately and buy whatever appears to be making our brother-in-law rich. 

In hindsight, we can see how well this strategy works:

  • The internet stock boom led to a dot.com bust;
  • CDOs (collateralized debt obligations) led to the Great Recession;
  • Fracking led to a massive oil glut in the United States, decimation of the energy sector, global turmoil, a U.S. earnings recession, and untold environmental damage;
  • Meme stocks (stocks that go viral on social media) exploded higher and then exploded;
  • Multiple altcoins (cryptocurrencies other than bitcoin) created millionaires before going bust. 

Large upswings in specific investments very often lead to large collapses in the very same investments. If you are getting in them because they increased in value, you are trying to buy other people’s profits — but you are likely overpaying. It is impossible to know how far or for how long such episodes will last before they fall apart.

Fear of impending doom

On the flip side, we may not be motivated by greed at all. We may be losing money, or fear losing money, and decide to sell our current portfolio to “protect” ourselves from this possibility, which doesn’t work any better. 

Strangely, the financial punditry reacts to every 10% correction as if it were the end of the world, and we broadly accept this reaction as truth. But it isn’t. Such corrections are, as anyone with the slightest sense of market history knows, a common occurrence. The average annual drawdown from peak to trough in the S&P 500 is about 14%. Whatever they are screaming about today may ultimately reach that mark. Or it could be more. Or less.

No matter how many people opine on the subject… no one can know, and it cannot be predicted. And, of greater importance to long-term, goal-focused, planning-driven investors like us — it does not matter. 

You cannot predict your way around market declines. If you cannot ride out a market decline approaching 15% on an almost annual basis — and a decline averaging twice that about twice a decade — you simply should not be invested in equities. 

Your investment portfolio is a servant of your financial plan, which was derived from your most cherished financial goals. It goes something like this:

Values determine goals.

Goals determine plans.

Plans determine portfolio.

I don’t see “current events” or “yesterday’s market action” anywhere in this decision tree. 

“Values — Goals — Plans — Portfolio” anchors our portfolio in the long term (which is the only term that matters in a lifetime of investing). And yet, your long-term commitments will be tested on a very regular (read: daily — if not hourly) basis.

There is no escaping these six fundamental investing truths:

  1. We will experience both greed and fear when we invest.
  2. The reality is that markets are inherently unpredictable.
  3. This unpredictability doesn’t stop anyone from trying to predict them.
  4. Some of those who try will get it right and scream it from rooftops.
  5. No one can know in advance which predictions will be right because the future of markets is inherently unpredictable. Those who do get it right are lucky; not skillful.
  6. Most important of all: YOU DON’T NEED TO GET IT RIGHT TO BE SUCCESSFUL. 

A non-judgmental awareness of our limitations allows us to separate our diversified portfolio’s relative short-term performance from our belief that we are doing something wrong. The siren song of outperformance is always incredibly attractive, until we crash on the rocks.

In the short term, it is all speculation. It is all a crapshoot. An individual investment for a short period of time can be tossed about by all manner of unexpected occurrences. There is no predictability. We cannot manage risk or return in the short term… so we let it go.

All successful long-term investors are continuously acting on a plan that is founded on their deeply personal values and goals. All failed investors I’ve encountered were continually reacting to yesterday’s headlines.

Which do you choose?

Stop predicting. Start Planning. Stay Mindful.

Jonathan DeYoe, President and Founder of Mindful Money. Photo: Courtesy Karolina Zapolska

Jonathan K. DeYoe, a Registered Investment Advisor, is passionate about personal financial planning, financial literacy and helping clients achieve better outcomes through mindfulness.  He is the author of “Mindful Money: Simple Practices for Reaching Your Financial Goals and Increasing Your Happiness Dividend.”  You can follow Jonathan at mindful.money; on YouTube; on LinkedIn; on Facebook; on Instagram; and on Twitter.

This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Mindful Money and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Mindful Money unless a client service agreement is in place. Mindful Money is a service mark of DeYoe Wealth Management, Inc. a Registered Investment Adviser.