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Our Fundamental Rule #3 of Investing: own the orchard for the fruit crop. What do we mean?
If the fruit crop is enough to live on, you would not have to care what the neighbor would pay for the orchard – it’s not for sale! Whether the latest bid was higher or lower than the day before makes no difference.
You can think of your long term portfolio the same way. If it produces the cash flow you need, fluctuating values don’t always affect your real life – you buy groceries with the income, not with the statement value. The down years may have no impact on your life or lifestyle. All we need to know is where to find the cash you need, when you need it, to do the things you want and need to do.
This is what we mean when we say “own the orchard for the fruit crop.” It’s important, because enduring volatility is an inherent part of investing for total return.
There are two key points of caution. This approach presumes you keep the faith that downturns in the market end someday, that the economy recovers from whatever ails it—and you do not sell out at low points. Also, it assumes that your short term lump sum cash needs are covered by savings that do not fluctuate.
Clients, this understanding is key to our work. Please call or email us if you would like to talk about it, or anything else.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
No Free Lunch
From time to time, we meet people who are devoted to avoiding the worst selloffs in the market. When there are so many simple statistical tools available to keep track of the trend, they say, it makes no sense to stay in the market when the trend is against you.
For example, by selling out when the major stock market indices dip below their 200 day moving averages, and buying back only when they climb back above, one could have avoided significant damage in the worst downturns.
The problem is, one could also have avoided some really sharp recoveries from low levels. And in any lengthy test of these mechanical rules, generally they would have cost money to implement.
The key question is, what fraction of your total returns would you be willing to give up in order to get a smoother ride along the way? Would it be OK to have 30% less money after twenty years? 20% less? 40% less?
Our point is, there is a cost to the human preference for stability. There is no free lunch. The trend-following systems that save you from damage also tend to water down your results over the long term.
We believe we get paid to endure volatility. Living with the ups and downs when so few are willing to do it…that’s what we do. We seek to understand what fraction of your money can be invested for the long term, without regard to volatility—and invest for you on that basis.
The markets have had volatile spells, but year by year results have been positive since 2009 in the major averages1. We know that sooner or later, unpleasant times are going to come around.
Our principles may hope to offer some cover from overvalued markets. Avoiding stampedes and seeking the best bargains may or may not limit the damage—we have a mixed record, and no guarantees. With the uncertainties of the markets, and the impossibility of knowing the future, it is comforting to have principles by which to operate.
Clients, if you would like to talk about this or anything else, please email us or call.
1Standard & Poor’s 500 Index, S&P Dow Jones Indices. Retrieved May 21st, 2018.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All investing involves risk including loss of principal.
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