It’s that time of year when polished financial executives in $1,000 suits come out with their annual market prognostications that attempt to predict which direction the markets are going over the next year. It always reminds us of one of our favorite quotes from Warren Buffett:
‘A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.’
In other words, no one really knows, but many financial executives feel like they need to make predictions to sound smart and to justify their own existence (and their high fees).
With that in mind, we think it makes sense to re-examine our philosophy about investing.
Our Investing Philosophy
We believe the best way to grow wealth over time is to invest in a diversified mix of stock, bonds and real estate from around the world.
We believe in gaining access to those markets through low-cost indexing. In other words, we don’t believe in paying a high-priced market prognosticator to flip a coin and make investment decisions.
We believe in rebalancing and staying the course. The markets are unpredictable in the short run, but we do know that the things we own go up and down at different times. When one thing is up, we sell some to capture the gain and use it to buy something else that is down (cheaper).
Like this:
We believe that good investing behaviors are the most important determinant of success. When investors save regularly and invest those dollars in diversified low-cost investments, rebalance and stay the course, they will be successful!
Over time this very simple philosophy creates great wealth!
Consider this, if you invested $10,000 into US stocks 40 years ago, held on and reinvested the dividends, you would have over $700,000! That’s over 70 times your original investment in nominal terms and over 20 times your money after adjusting for inflation.
Check out this calculator:
https://dqydj.com/sp-500-
Money at Risk
So, why put money at risk at all? Well, the truth is, there’s no such thing as zero-risk… period! You can’t eliminate risk, your only option is to exchange one risk for another. For example, you can exchange market risk for inflation risk by taking your money out of the markets in favor of sitting in cash.
The problem with that is that at 3% inflation (the average compound rate since WW2) your purchasing power is reduced by half roughly every 20 years. Do the math on that, it’s scary!
We put money at risk in the markets because it’s the best way to outpace inflation.
We are all human, and that means we all have an emotional reaction when we see the value of our accounts go down. We do it too! But it’s important to remember that market downturns are part of a larger market cycle and that over time, stocks go up, and are the best way for us to expand our purchasing power!