When Winning Doesn’t Mean You Always Come in First
Presented by Mark K. Lund
Nothing puts a chill on the mood of investors like the specter of inflation. Not only does it dampen demand for goods and services as consumers rein in spending, but it also tends to create a less favorable business environment as the Federal Reserve aims for higher interest rates, raising the cost of corporate debt.
So, it’s not surprising that in early April higher than anticipated inflation numbers sent stocks falling. However, as revised (and more accurate) numbers came in, the Fed signaled their intent to cut rates later in the year. This, along with better-than-expected first quarter earnings, caused the market to regain lost ground. And the second quarter ended with a gain of 3.48%. This brought the increase for the previous twelve months to a healthy 23.78%. (1)
Again, the biggest growth came from a narrow group of tech stocks. Also, the yield curve remained inverted—seen by some as a sign that a recession could be in the future. And popular alternative investment bitcoin, which had a record breaking first quarter, settled back down to its February level.
With this kind of mixed data, you could plausibly argue for wide range of near- term market behavior. It’s no wonder that strategists have been giving guarded opinions, saying things like, “Yes, these gains are good, but stocks could tumble at any time.” It’s the kind of statement you see in the financial media any time the market does better than expected.
And once again, the market rewarded those who shrugged off short-term losses as they stayed in a position to benefit from unexpected gains.
However, good feelings can be just as deceiving as bad. Long-term investors know that just as they take their temporary, paper losses in stride, they should also be stoic about their short-term gains. It feels too good to open your quarterly statement and see that your portfolio has made significant gains. But pleasant emotions are not the ultimate goal when investing for retirement and can in fact hamper clear thinking about financial strategy.
For example, it’s easy to think that if a broadly diverse portfolio had decent gains for the quarter, wouldn’t it make sense to double down on some of those high performing AI tech stocks and see even better returns?
Decade after decade of research has shown that for the individual investor saving for retirement, pursuing short-term gains is far more risky than long- term discipline.
In just a few weeks you’ll have a chance to watch the Olympic decathlon, one of the most anticipated displays of athleticism in track and field. To win this grueling contest of ten events in two days (and maybe get their picture on the Wheaties box as the World’s Greatest Athlete), the contestants need to take a counterintuitive approach to winning. They will need to plan on losing most of their events.
When U.S. decathlete Ashton Eaton won gold at the London Olympics, he finished first in only three of the ten events. (2) Even though he set an Olympic record in the first race (the 100 meter dash), he didn’t grab a flag and take a victory lap. He had to get ready for his next event.
At the end of the second day, when he lined up for the final race (the 1500 meters—just under a mile), his goal was purposely not to win. The decathlon is scored by points. To tally the highest total, Eaton needed only to finish in the middle of the pack. And so, his strategy for winning the overall gold included letting at least ten other runners finish ahead of him.
Why? Eaton was built like a sprinter and an attempt to take first the middle- distance race could have ended with him running out of gas halfway through the race, nullifying everything he’d accomplished over the past two days. He stuck to his strategy, letting multiple runners pass him, and he traded a loss in the 1500 meters for decathlon gold.
In the same way, a long-term investor with a broadly diversified portfolio should expect his or her quarterly performance to come in below that of the season’s highflyers. Like Eaton’s strategy, it’s by design.
Berkshire Hathaway CEO Warren Buffet has stated that investors who get caught up in short-term thinking actually benefit those with long-term view.
“Many investors,” Buffet said, “some of them big, are constantly trying to outsmart each other.” He adds that this “game” is focused almost entirely on short-term profit. This leaves much more opportunity for those who are in it for the long-term. (3)
In addition to maintaining a long-term view, the prudent investor will also acknowledge their own shortcoming when it comes to gauging things such as the future performance of the economy. We saw how some of April’s early decline could be attributed to investors’ responding to economic data which later turned out to be inaccurate.
We as individuals also tend to have a limited data set (what we’ve heard from friends and family and maybe learned on financial media) and take that as an accurate picture of the economy as a whole. If we can’t find a job, unemployment is a problem. If the landlord raised our rent, then rising housing costs are an issue.
A University of Michigan study found, unsurprisingly, that people’s political affiliation has a significant effect on their economic expectations for the near future. If you support the party in power, you think things will be getting better. If you like the opposition, you’re much more pessimistic about what’s around the corner. (4)
It’s good to remember that economic data is a generalization describing what happened for hundreds of millions of people. Your experience most likely has been and will be very different.
As a prudent investor, you don’t need to worry about what the experts say is going to happen, especially in the near future. Working in partnership with your trusted advisor, you are free to continue along the financial plan created specifically for your unique situation and based on real numbers.
Rather than fearing the future, you can take a diversified, long-term approach that expects ups downs and so looks to maintain flexibility while building resilience. Acting on the things you have control over is a much more productive than worrying about guesses on macro level trends.
Sources:
1. https://www.morningstar.com/markets/13-charts-markets-q2-turnaround
2. https://www.espn.com/olympics/summer/2012/trackandfield/story/_/id/825
0680/2012-london-olympics-ashton-eaton-wins-decathlon-lead-198-points
3. https://www.marketwatch.com/story/warren-buffett-says-investment- opportunities-come-from-other-people-doing-dumb-things-647d371a
4. https://www.marketplace.org/2022/08/31/why-republican-consumers-are- glum-and-democrats-upbeat/
Disclosure:
This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by Efficient Advisors, LLC (“EA’) for Mark Lund, Mark is a Financial Advisor in Utah. He is known as a Wealth Advisor, The 401k Advisor, Investor Coach, Financial Planner, Investment Advisor and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. a fiduciary, independent, fee-only, Registered Investment Advisor firm providing investment management and retirement planning for individuals and 401k consulting for small businesses. Mark’s newsletter is called The Effective Investor Newsletter. Cities served in Utah are: Salt Lake City, Salt Lake County, Utah County, Park City, Murray City, West Jordan City, Sandy City, Draper City, South Jordan City, Provo City, Orem City, Lehi City, Highland City, Alpine City, American Fork City. The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.
