Performance

How to Invest in Uncertain Times (part 1)

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The market has been rocked. In the last two weeks (March 3-16, 2020), the S&P 500 has lost over 22% of its value. It’s the fastest 20% descent we’ve ever seen, and no one knows exactly where the bottom will be (or if we’ve already hit it). The market has moved in percentage multiples, both up and down, every day last week, an incredible level of volatility. The leading cause, which still feels surreal, is the propagating Covid-19 virus which has led to mass closings and increasing restrictions. Suffice it to say, it’s been a crazy couple of weeks.

In many ways, we’re in uncharted territory, which means we’ve got questions, like how are we supposed to respond to all of this? What’s the right thing to do when we’re confused about what’s happening? To add some clarity, I’ll offer up a few investing principles throughout this week.

 

Market timing doesn’t work.

  • No one knows what the market will do tomorrow. Many make predictions, but no one really knows. Don’t try to guess where the bottom is, or when we’ll hit it, or when to pull money out of the market, or when to put the money back in. The market is efficient.
  • Let’s say you really want to get out of the market because you don’t believe we’ve hit the bottom yet and you’re not interested in sticking around to find out. In order to successfully time the market you have to get two bets right: you have to get out of the market before it hits the bottom, and you have to get back in at or very near the bottom. The odds are not favorable.
  • A market study conducted at the University of Michigan measured returns from 1963 through 2004 (a period of 42 years). They found that 96% of the positive returns over that period came from 0.85% of trading days (90 out of 10,573 total trading days).
  • Another study done by A. Stotz Investment Research observed a 10 year period, from November 2005 through October 2015. After running the data through several simulations, they concluded that if you missed the 10 best market days over the specified 10 year period, you would stand to lose, on average, 66% of the gains you would have captured by staying in the market.
  • When the market moves up, it moves up quickly. Whenever your money is on the sidelines, you risk missing some of the best days the market has to offer. So stay invested, don’t panic, and anticipate the rebound.

Context is Decisive

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Context is the air we breathe, the water we swim in. It’s our outlook, our worldview, how things occur to us, what we believe is true. It’s influenced by experiences, what we’ve been taught, things we’ve done and seen. Context is rooted in the past, much of it originates from childhood, from formative years. For that reason context is super sticky, it has a lot of staying power, it’s hard to change. And as people get older, they become less and less inclined to change their minds, or even to listen to different ideas.

Context is correlated with action; or, our actions naturally flow from our context. Context is similar to identity in this way. If you identify as an overweight person, you’ll take actions that are consistent with that identity. You’ll eat a lot of unhealthy food and you’ll spend a lot of time on couches. You’d have an incredibly difficult time losing weight, assuming you even wanted to try. If you identify as a healthy person, on the other hand, you’ll watch what you eat and make the gym a regular part of your routine. It’s baked into who you believe you are.

Context is partly what you believe about yourself, but it’s also what you believe about the world. If you believe people are generally nasty and selfish, you’ll have a hard time caring about a stranger. You won’t even want to meet a stranger. If you believe money is scarce (which the vast majority of us do), you’ll feel a measure of helplessness about your long-term earning prospects. The process of money-making feels like a grind, not the motivating ‘work hard’ grind, the boring, fruitless, hopeless grind. On the flip side, if you believe money is abundant, you’ll be inspired to work hard, be valuable, find ways to help people, and most likely accumulate more money.

Since context is sticky we often feel stuck in them, even if we realize they exist. We fall into ruts, or routines, or habits, that stem from our context and then we don’t change. It’s like our contexts are hardwired into our brains, like we’re in the Matrix, unable to detach from the machine. But, we’re not entirely powerless in relation to our contexts.

We can control our inputs, what we’re reading, watching, and interacting with. Good books can have a profound impact on how we think. Take time to interact with and evaluate other ideas and arguments and contexts. The world is way bigger than our limited experiences.

We can take a step back and evaluate them. If you can understand your context, and even some of the background that helped mold it, you can begin to see how it could be different.

We can also control what we say. Context is intricately tied to language. Words are how we organize and process what we see and experience, we speak and listen and think with words. And we can use different words, like ‘scarce’ instead of ‘abundant’, or ‘get to’ instead of ‘have to,’ or say ‘thank-you’ more often. Those are subtle changes, but sometimes what we need is a perspective that leans a different way.

So context is decisive, but it can also be changed. I would start with a good book.

It’s a Rough Day in the Market

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As I write this on March 9, 2020, market indexes across the board are down, some by as much as 9%. Coronavirus has made the market skittish enough over the last few weeks, to compound things Saudi Arabia announced massive cuts to the price of oil this morning, which actually seems kind of great (lower gas prices!), but markets have not reacted kindly. The response feels like panic. It’s certainly a bad day in the market, but I want to provide a little bit of context for all of this.

 

Here’s what you should know:

  • Unless you know the future or have inside information (unlikely, and illegal to trade on), you should be a long term investor. Short term market moves are pure gambles, and most often end up hurting investors. Don’t move money based on fear, which is all we hear in the news, especially on days like today.
  • Despite what pundits may be saying, no one knows what the market will do tomorrow. No one knows where the bottom of a downturn is, no one knows how long it will last or how quickly the market will come back. Don’t panic with your money, especially when the market is down.
  • Bad market days have happened before. On Black Monday (October 19, 1987) the Dow Jones Industrial Average dropped 22.61%, in one day! In order to crack the top 20 bad market days the Dow would have to lose 7%, but even if that does happen, we’ve seen the market bounce back from far worse.
  • The market bounces back quickly. When the S&P 500 loses 10% or more it recoups all losses within an average of about 4 months. The worst thing you can do is move money when the market is down and miss the bounce-back.
  • A limited number of great days in the market account for most of the great returns. A 20 year period between 1998 and 2018 included 5,040 trading days. If you missed the 30 best market days out of the total 5,040, you would have ended up with a slightly negative return over the 20 year period, $10,000 would have turned into less than $9,000. We don’t know when those great days will come (though we know they often follow bad days) but we definitely don’t want to miss them by being out of the market.
  • Markets move, but the general trajectory is up. If you’re invested for the long haul and you understand your risk tolerance, bad market days are no problem. They don’t even have to be stressful.

 

Here’s what you should do (or not do):

  • Don’t panic. This is not the first time we’ve had a bad day in the market and it won’t be the last. The worst thing you can do is move your money out of the market. In fact, bad days in the market are a great time to invest more.
  • Make sure you understand how and why you’re invested the way you are. The market will sustain losses, but an un-diversified portfolio stands to lose a lot more. On the flip side, a well-diversified portfolio can put your mind at ease.
  • Make sure your diversified portfolio has a systematic way of rebalancing. When the market is moving, a system for rebalancing will ensure that parts of the portfolio that are doing well are sold, and the parts that are down are bought. It’s an automatic ‘buy-high-sell-low’ feature.
  • Work with an investor coach. When things look bad, all the news and information surrounding you will only confirm your worst fears. An investor coach will keep you disciplined, make sure the accounts are rebalanced, and will ultimately guide you through turbulent markets to a successful outcome.

To Start a New Habit You Have to Ask One Question

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Habits are notoriously difficult to manipulate. We typically fall into patterns of behavior unwittingly and then get stuck. It’s tough to ditch old habits and it’s tough to start new ones. Unless you have an understanding of how they work. Hopefully, this will help.

BJ Fogg, the author of Tiny Habits, has observed five main obstacles that prevent people from forming new habits: time, money, physical effort, mental effort, and routine. Any one of those things, or several of them together, can derail your most noble habit change initiatives. So what’s the solution? Start with a simple question: how can I make this easier?

Humans generally operate by default, and they usually default to the easiest option. Steve Jobs tapped into this idea when he created iTunes. In the late 1990s and early 2000s, the music industry was sweating. The rise of software like Napster and other illegal digital downloading options made music theft alarmingly pervasive. Free music wasn’t just annoying for artists and producers, it threatened to shut down the entire industry. Music may be created for the sake of art, but there would be significantly fewer artists if no one was being paid to create the music. Jobs realized that people wouldn’t stop downloading free music for a moral reason, but they might for a more convenient reason. Thus, iTunes was born. The easiest way on earth to obtain music. Sure, there was a cost, but Jobs knew that people would pay for convenience, that they would drift towards ease. The iTunes/iPod music experience not only transformed the music industry, but also saved it. Jobs made obtaining and listening to music easy.

I think about some of my own recent habit initiatives. I’ve been trying to get out of bed early and consistently for a while with little success. I’ve tried moving my phone away from the bed, I set my clothes out the night before, I even prep the coffee maker in the evening so coffee is hot and ready when I wake up. The issue isn’t time, in fact, it would give me more time if I could nail this habit. It’s not a question of money, I don’t have to pay anything to wake up on time. Nor is there any problem fitting my desired wake up time into a routine. But it does involve some physical and mental effort to get out of bed on a cold dark morning. So my previous efforts are good, they definitely make my desired habit a little easier, but they haven’t tipped the scale yet, I need to make it easier.

Fogg also outlines a concept he calls ‘starter step.’ This is the idea that you don’t have to digest the entire habit all at once. Our habit initiatives often fail because we’re stuck on an all-or-nothing approach which relies on motivation to take action, and motivation is nothing if not fickle. Fogg suggests instead of trying to suddenly incorporate an hour-long gym session into your day, start by packing your workout bag in the morning. The habit you need to develop is not going to the gym and throwing weights around for an hour, you simply need to pack your gym bag every morning. If your gym bag is packed and ready, your mind will be more receptive to the idea of stopping by the gym on your way home from work. If you want to walk every day, focus on simply tying on your walking shoes. You don’t have to pressure yourself to workout or walk, just habituate the starter step and you’ll find yourself doing the workout or taking the walk more often than you don’t.

So I’ve come up with a starter step of my own to make my regular-wake-up habit initiative as easy as possible. Every morning when I climb out of bed to silence my alarm, I will turn on my lamp for ten seconds. If after the ten seconds I still can’t resist the warmth of my flannel sheets, fine, I’ll keep working at it, but my guess is that the light will wake me up enough to eschew the flannel and get started with my day. I wish I could say I’ve already proven this theory and it’s foolproof, but I’ll have to let you know how it turns out. Here’s to the unending pursuit.

How can you make your habit easier?

Book Takeaways – Atomic Habits

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This year I’m a part of a book club. Each month we read one book in the genre of self-improvement and meet to discuss our findings and takeaways. January’s book was Atomic Habits by James Clear. Along with the regular book club meeting, I’m going to highlight some key ideas and actionable items for you, my readers. Books may be the single best source of knowledge and wisdom available to humans. I love reading, and I love sharing ideas I’ve read so this exercise will tick a few boxes for me. Here goes. 

  1. Outcomes are a lagging measure of our habits, we get what we repeat. This is great news because it means we can work to change our habits and get different outcomes. 
  2. Goals are not correlated to results. Clear makes an impactful point that winners and losers have the same goals. Goals are helpful for providing direction but mostly worthless in obtaining a desired result. For that, we need systems/habits.
  3. Habits change identities. I consider this Clear’s most profound and important contribution to the discussion of habits. We fail to make lasting behavior changes routinely, regardless of our intention or passion, the size or specificity of our goals, or the breadth of our knowledge. Even when faced with an ultimatum, change or die, (ie, change your diet or your diabetes will kill you) people fail to change. The reason is that our actions are closely knit with our identities, and we fail to change who we are. The antidote is to start with a tiny action. Just do something good, however small. Each good action is undeniable proof that we have acted like (been) a different person, and that begins to mold our identities. The point of all this self-improvement effort is not to accomplish goals, it’s to become different people. I don’t need to lose 20 pounds, I need to become a healthy person. I don’t need to make $200k in five years, I need to become a valuable coach. The pounds and money are only byproducts.
  4. Make good actions easier and bad actions harder. In order to begin taking the small actions that will shape our identities, it’s helpful to set ourselves up for success. Humans drift toward the path of least resistance by default, so remove resistance from good actions and add resistance for bad actions. A few examples: 1) Set out your workout clothes before bed so it’s easy to wake up and get dressed for the gym. 2) Unplug the TV after each use so you have to plug it in if you want to watch something.
  5. An implementation intention is critical for habit building and behavior change in general. We tend to set goals and hope for some motivation to begin working on them. The problem is that motivation is scarce and inconsistent. An implementation intention solves that problem, it means we make a plan to implement our new habit by giving the habit a regular time and a regular place. In order to do something different, you must have a plan for it. If you intend to work out, choose a regular time (that fits into your schedule), and a regular location (whether it’s a space in your house or gym nearby). We make plans for all sorts of important things in our lives, habits call for the same attention.
  6. As a general rule, the more immediate pleasure you get from something, the more suspicious you should be of its long-term benefit. Not that we need to stop doing things that make us happy, just be aware that immediate pleasure and long-term benefits are almost never congruous.
  7. At some point, it comes down to who can handle the boredom of taking regular good action, day after day. You become healthy by eating good meals every day. You get strong by lifting the same weights over and over. You gain wealth by doing the same important function of your work time after time after time. Fall in love with the process, embrace the boredom.
  8. Success is not a goal to achieve, it’s a system of improvement, an endless process of refinement. It’s incredible what you can build if you just don’t stop.