Successful investors act with the long term in mind, making portfolio strategy changes infrequently over the course of time when appropriate. They never make changes merely because the earth is at a certain point in relation to the sun or in response to market movements. The definition of “long term” for the vast majority of individuals is measured in decades. While this is easy to understand for an investor who is age 25 or 45, this is also generally true for a 65 year old because actuaries tell us this cohort has very good odds of living well into their 80’s and even 90’s. The continuing advances in medicine and the growing number of centenarians suggest that many more people could live to see their great-great-grandchildren. And for some, life expectancy is irrelevant because they have legacy plans for their assets to work for someone else long after they go to the Great Stock Exchange in the Sky.
All of this is to say that proper investing is a marathon that lasts decades and is not a series of one year sprints.
This is why we have long advocated an investing approach that starts with a broad asset allocation between stocks and bonds that is appropriate to one’s individual circumstances. This is a long term strategy that should only change very infrequently unless there is a significant change to the original circumstances. The natural process is to invest more heavily in stocks when in their 20’s and 30’s to take full advantage of time in the market, gradually decreasing exposure to stocks and more to bonds in the years approaching retirement, and further increasing exposure to bonds later in retirement to better assure income.
This is easy to describe, but most investors have human emotions that tend to interfere with rational implementation. For many, simply getting to understand a multi-decade multi-asset class approach can be a huge step in improving their ultimate results. This change of attitude can allow them to understand that while any given current situation can seem dire, even large negative returns are that way for just moments in time and are not permanent. Time has a way of making panic reactions ultimately seem foolish.
Remember the Crash of 1987 when the S&P500 fell more than 20% in just one day? A mere blip on a long term chart.
The Russian financial crisis of 1998 that caused the S&P500 to fall about 22% in less than three months? A minor interruption in the Great Bull Market.
The panic of 2008 when the S&P500 ultimately fell about 57% from its high? The index has doubled since then.
The many other recessions, crises, wars, inflations, etc. the United States has experienced within just the last century? 100% recovery.