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It’s important that investors understand all risky assets can experience long periods of underperformance.
My favorite example that makes this point is that, for the 40-year period from 1969 through 2008, the S&P 500 Index returned 9%, and so did 20-year Treasury bonds. Making matters worse, while producing the same returns as long-term Treasuries, the S&P 500 experienced far greater volatility—its annual standard deviation during the period was 15.4% compared to just 10.6% for Treasuries.
That equities could underperform Treasuries for 40 years surprised many people, but it shouldn’t have. No matter how long the horizon, there must be at least some risk stocks will underperform safer investments.
Another risk premium also failed to appear over this same 40-year period, one that has received far less, if any, > SEE MORE
While I could provide an almost endless list of forecasts that went wrong from so-called experts, among the most infamous was surely Meredith Whitney’s December 2010 forecast of between 50 and 100 “significant” municipal bond defaults, totaling “hundreds of billions of dollars.” In March 2011, noted economist Noriel Roubini jumped on Ms. Whitney’s bandwagon, predicting $100 billion in defaults over the next five years. Such forecasts led to massive withdrawals from municipal bond mutual funds.
The massive scale of problems that Whitney and Roubini anticipated didn’t occur because many (though far from all) governments took actions to address the problem, cutting spending and raising revenues.
However, investing in municipal bonds is riskier than many investors may perceive, with last year’s $74 billion default by Puerto Rico providing a reminder. There have been other significant ones in recent years, including > SEE MORE
I think most investment professionals are generally aware of how well the S&P 500 has done relative to virtually every other asset class since the end of the global financial crisis (GFC). A bit more precisely, the S&P 500 is up 352 percent from March 2009 through October 2018 while international developed stocks, emerging markets stocks and bonds are up 140, 142 and 39 percent, respectively. What you might be surprised to know though (I certainly was) is that it’s almost impossible to simulate another same-length period where the S&P 500 had better risk-adjusted returns. In other words, saying the S&P 500 has done well during this period is a gargantuan understatement. As we will see, it’s done so well that it’s reasonable to ask whether anyone alive will ever > SEE MORE
Legendary investor Warren Buffett famously stated: “Success in investing doesn’t correlate with IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people in trouble investing.”
The reason temperament trumps intellect is that having the right temperament is what allows you to ignore the “noise” of the market and be a patient, disciplined investor, adhering to your well-thought-out plan through the inevitable bad times—times when even good strategies deliver poor outcomes.
What does it take to be an investor whose temperament allows you to be patient and disciplined? My almost 25 years of experience as an advisor has taught me that there are seven keys to success. The first—and most important—one is that you need to understand the nature of the risks of an investment before you commit to it.
1. Understanding the Nature of Risks Before Investing
When investment strategies are working, delivering positive returns, it’s relatively easy to stay the course. However, > SEE MORE
In September 2017, about a year ago, a massive Equifax security breach became public knowledge. If there was a silver lining to this infamous event, it likely spurred more consumers to take more measures to protect their identities. Perhaps you’ve frozen your lines of credit, or you’re at least checking your credit reports more regularly these days.
All well and good. But what about your kids? As distasteful as the idea may be, child identity theft is a serious and growing concern, for several reasons:
Founder and Private Wealth Advisor
Beacon Hill Private Wealth