Tuesday, June 30, 2015

Investing Advice for Volatile (As Opposed to Risky) Markets ... Watch but Don't Panic and Sell ... Consider Buying Instead

Greece issues combined with slow growth in China and even some news from Puerto Rico caused nervous market traders to sell, sell, sell yesterday. It was indeed a lousy market as the Dow ended the day ~350 points lower than where it began.

The traders sold, but the investors stood pat. That's what long term investors do. They react to news about the companies in which they invest for the long haul but not to short term noise in the various markets and nations around the world.

As for me, I did a little buying near the close of trading yesterday. As Buffett says, it's best to be 'greedy' when everybody else is fearful -- and vice versa. Yesterday was a 'fearful' day.

Why Bogle and Buffett tell investors to ignore market noise has solid advice for individual savers and investors:

"If a tree falls in the forest and nobody hears it, does it make a sound? You might say, "Of course it does" — and you'd be right. But what if five trees fall at once? Fifty? . . .

As John Bogle, the founder of Vanguard Group, recently said in an interview, it's the noise of those falling trees that's the real problem.

That's because people see rising and falling prices — the normal, unceasing action of the stock market trying to price thousands of assets in real time — and they feel a need to react, to do something.


The fact is they should do nothing at all. Volatility is normal and should be utterly ignored. "Don't pay a lot of attention to the volatility in the market place," Bogle said. "All these noises and jumping up and down along the way are really just emotions that confuse you."

The question isn't "Will my investments go up or down?" — because of course they will. The question one should ask is, "Will the fact that investments go up and down bother me enough to do something dumb?"

You should know the answer to this question about yourself. Part of what a good investment adviser does for his or her client is to listen, to really hear the hopes and dreams and expectations of that individual.

It isn't data, it's emotions. People want certainty and security, but they understand that risk is part of the retirement investing equation.

The goal, then, is to find a balance that produces a steady, compounding return while minimizing the impact of a poorly timed emotional reaction.

None other than Warren Buffett addressed the issue of risk and volatility in a recent letter to his investors. The incorrect lesson often preached that volatility is a proxy for risk, “is dead wrong: Volatility is far from synonymous with risk," Buffett said, adding that equating the two terms leads the everyday investor astray.

For most investors, "risk" and "volatility" seem to go hand-in-hand. Experienced retirement advisers, however, understand that these aren't synonymous. Rather, they are two sides of a coin, related but never touching.

True risk

Risk is the negative side of the coin. It suggests the chance of loss. We don't like risk but we understand that it is part of life. If risks were completely unacceptable, we couldn't leave the house, cross a street or drive a car.

Naturally, we seek to reduce risk where possible (seat belts and air bags) and we insure ourselves against financial losses some risks could impose. In a portfolio, diversification and rebalancing play these roles by broadening our holdings and enforcing best practices.

Volatility, the confusing noises Bogle points out, is in fact a good thing for our portfolio. If you are a serious long-term investor with many years to go before retirement, a decline in stock prices is a chance to buy more, more cheaply. Buy stocks when they fall in price and go on sale, as Buffett has long advocated.

If you are closer to retirement, your risk-adjusted portfolio is going to be less volatile by design. Risk reduction from your own emotions can be achieved.

The true risk lies is betting on specific investments in hopes of beating the overall market. That's how you set yourself up for the "falling-tree trap" and, eventually, expose yourself to emotions that cannot help but put your retirement in real danger."

Summing Up

Today should be a better day for the market than yesterday.

And ten years from now, yesterday will be forgotten.

By then the market, including dividends, will likely have doubled from its current levels.

At least that's what usually happens over a ten year period.

So that's my take.

Thanks. Bob.

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