You've probably heard someone proclaim they "can't see the forest for the trees." We are human, so this cliche has a ring of truth to it. Often it is easy to lose sight of the 'big picture.'
It is especially hard when you follow stocks. When markets are volatile stock quotes have a real hypnotic quality. It's like watching a suspense thriller - you can't take your eyes away because you just know something very important is about to happen.
Yet, when you look at the 'forest' - the portfolio level - individual stock price movements become just a lot of noise, because at the portfolio level everything hums along very nicely or ugly just like the overall market.
During the last few weeks, stock prices have been all over the map, and the Vix (volatility index) has been spiking higher and higher. But, it hasn't made very much difference when you look at just the bottom line performance of the portfolio.
What has your portfolio done vs. the overall market? Does it really matter if you lost three percent if the market is down four or five? I suppose it matters if you need the money now, but that kind of money should never be in the market in the first place. That argument doesn't make much sense to me.
If you are properly diversified across economic sectors, and you have selected quality stocks, chances are that you will at least pace the market's performance. In our case, we have always been slightly overweighted in defensive stocks, but not excessively so. This approach is ok with the fact that we may lag a bit during bull markets but outperform (catch up) during corrections. The reward is less volatility.
If, over time we don't meet our performance goals, we will go easy on ourselves. Performance in the stock market is not a verdict on your intelligence, or even your skill as a 'finance wizard'. It only is how you view risk versus value. In the end, it doesn't even matter what the market 'thinks.' At least when you view it from the time horizon Warren Buffet and others do. Now that is what I call seeing the forest for the trees. The smart guys use diversification, quality, and most importantly - time, to their advantage.
Now certainly we invest for a reason, and it is usually to buy some freedom, wealth, security, charity, etc. for those we love - and, o.k. some for us, too. And, we'd like it during our lifetime, thank you.
This is pretty much the entire basis for the concept of asset allocation. And it's why investment people tell us to adjust it as we grow older. It does makes sense, and we should understand this approach, but it is not Gospel. It is advice intended to get us to think in terms of what we invest in, how we manage risk, and why. For example our portfolio is "under-weighted" in fixed income investments, but our philosophy considers defensive stocks to be equivalent to bonds, at least the ones we have. Why? Becasue they grow their dividends. And we can choose to do this because we have the luxury of time. If you ask me when I am 65, or if you ask someone else with a lower tolerance for risk, you may get a different answer.
If we decide to look at any trees, they ought to be the individual payout ones - meaning the dividends of the companies, not their daily stock price movements. It doesn't mean that you don't monitor the company's ability to continue paying and increasing dividends, and then make prudent decisions accordingly. It does mean you effectively decide where your time and energy is most productively focused. And my energy is not focused on what the lemmings say one of my individual stocks is worth today.
It is especially hard when you follow stocks. When markets are volatile stock quotes have a real hypnotic quality. It's like watching a suspense thriller - you can't take your eyes away because you just know something very important is about to happen.
Yet, when you look at the 'forest' - the portfolio level - individual stock price movements become just a lot of noise, because at the portfolio level everything hums along very nicely or ugly just like the overall market.
During the last few weeks, stock prices have been all over the map, and the Vix (volatility index) has been spiking higher and higher. But, it hasn't made very much difference when you look at just the bottom line performance of the portfolio.
What has your portfolio done vs. the overall market? Does it really matter if you lost three percent if the market is down four or five? I suppose it matters if you need the money now, but that kind of money should never be in the market in the first place. That argument doesn't make much sense to me.
If you are properly diversified across economic sectors, and you have selected quality stocks, chances are that you will at least pace the market's performance. In our case, we have always been slightly overweighted in defensive stocks, but not excessively so. This approach is ok with the fact that we may lag a bit during bull markets but outperform (catch up) during corrections. The reward is less volatility.
If, over time we don't meet our performance goals, we will go easy on ourselves. Performance in the stock market is not a verdict on your intelligence, or even your skill as a 'finance wizard'. It only is how you view risk versus value. In the end, it doesn't even matter what the market 'thinks.' At least when you view it from the time horizon Warren Buffet and others do. Now that is what I call seeing the forest for the trees. The smart guys use diversification, quality, and most importantly - time, to their advantage.
Now certainly we invest for a reason, and it is usually to buy some freedom, wealth, security, charity, etc. for those we love - and, o.k. some for us, too. And, we'd like it during our lifetime, thank you.
This is pretty much the entire basis for the concept of asset allocation. And it's why investment people tell us to adjust it as we grow older. It does makes sense, and we should understand this approach, but it is not Gospel. It is advice intended to get us to think in terms of what we invest in, how we manage risk, and why. For example our portfolio is "under-weighted" in fixed income investments, but our philosophy considers defensive stocks to be equivalent to bonds, at least the ones we have. Why? Becasue they grow their dividends. And we can choose to do this because we have the luxury of time. If you ask me when I am 65, or if you ask someone else with a lower tolerance for risk, you may get a different answer.
If we decide to look at any trees, they ought to be the individual payout ones - meaning the dividends of the companies, not their daily stock price movements. It doesn't mean that you don't monitor the company's ability to continue paying and increasing dividends, and then make prudent decisions accordingly. It does mean you effectively decide where your time and energy is most productively focused. And my energy is not focused on what the lemmings say one of my individual stocks is worth today.
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