By Kent Schmidgall, CFP
Summer has wound down, along with the fishing season (at least in my geographic area), so what better time than now to contemplate the lessons that nature teaches? More specifically, what can we learn from those sleek, scaled, slippery friends in the lakes and ponds? As it turns out, plenty. Whenever I go fishing, I marvel at the correlation between the pond and the portfolio. Stick with me while I share some observations from nature, and some practical implications they might have for your own financial life.
Chasing past performance
Well do I remember my walleye fishing trip to Canada some years ago, where the slightest sign of angling success from my companions resulted in a flurry of switched lures and jig colors, not to mention the roar of motorboats speeding to a new, hotter location. And on an expedition to a local pond several months ago, I heard clamoring and splashing on the other end of the lake. Fearing that I would miss out on the action, I found myself meandering in that general direction, trying not to bring attention to my dearth of fish.
Whether in the Great Lakes or the Great Recession, chasing after assets that have performed well and abandoning assets that have performed poorly feels natural. However, in the world of investing this is a recipe for disaster (and I have yet to be convinced that it’s a surefire fishing strategy). As a 2021 study by Morningstar found, while the broad U.S. equity fund category returned 13.2% over the past 10 years, average U.S. equity investors earned only 12%, primarily because they tried to outsmart the market but kept getting in and out at the wrong times.
Not only is performance-chasing a poor investment strategy, it can be a dangerous planning strategy. If you are assuming historical investment returns when constructing your financial life plan, you may want to consider reducing the value of your assumed returns. Although the U.S. stock market (as measured by the S&P 500) posted an annualized return of 14.3% over the 10 years ending September 30, 2021, based on current stock market valuations it seems highly unlikely that past returns are a prudent assumption for future returns. Using an inflated future return assumption could have a severe impact on your plan’s outcome, so you should periodically review and update the capital market assumptions it uses. Strictly as an example, my firm, Buckingham Strategic Wealth, uses a forward-looking return expectation for the U.S. stock market that is about half the historical rate of return.
Skill or luck?
Perhaps you have successfully picked the right stocks over the years and maintained the requisite discipline to capture the growth in these stocks. My fisherman’s hat is off to you. Bear in mind, though, that just as in fishing, sometimes it is hard to distinguish skill from luck. This summer I participated in a guided fishing trip on Table Rock Lake. My nephew was quite successful from his position in our boat, while I had nothing to show for my efforts. Taking pity on me, the guide recommended that I switch places with my nephew. In a startling display of the difference between skill and luck, my nephew continued his success on the opposite end of the boat, while my fruitless struggle persisted. If only it were that easy to distinguish skill from luck in the world of investing!
Time in the water
“Kent, I’ve done tests and I guarantee you’ll catch more fish with the line in the water,” said my wiseguy fishing buddy. “It’s all about keeping the line in the water,” he would say. Similarly, in order to capture the returns of the market, we must stay invested in the market. Just like a long drought of fish might be followed by a sudden onslaught, market returns often come in short and unpredictable bursts, and we must stick around long enough to enjoy the returns.
Consider that $1,000 hypothetically invested in the S&P 500 in 1980 would have grown to $102,274 by the end of 2020. If you remove the single best day in the market during that time period, the accumulated value falls to $91,659; remove the best 15 days and the value drops to $34,212. (Please see additional disclosure below.)
The water is never “safe”
Earlier this year I experienced a pleasurable burst of productivity on the pond. As quickly as fortune had turned in my general direction, alas, it quickly left. Pining for the excitement to return, I cast again. And again. Just one more cast. Eventually, I caught a massive snag that required me to cut bait and lose a shiny spinner lure. The surface of the water was calm, yet danger lurked beneath surface.
No matter how calm and peaceful the stock market might seem on the surface, risk and danger always exist in the depths below. Stocks are always risky, and there is never a “safe” time to invest. There will never be a lifeguard telling you when it’s finally safe to wade into the murky depths of stock investing.
Without that lifeguard, the next best thing is to have a plan, be patient, and when the fish are biting, reel in calmly and slowly.
About the author: Kent Schmidgall, CFP®
Kent Schmidgall, CFP®, is a Wealth Advisor with Buckingham Strategic Wealth. He resides in southeast Iowa with his wife and three children. His perfect day includes a steaming cup of coffee, a warm fire, and a Dickens novel.
Important Disclosure: The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®. This article is for general information only and is not intended to serve as specific financial, accounting, legal, or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, confirmed the accuracy, or determined the adequacy of this article. IRN-21-2774
Additional Disclosure: Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Total return includes reinvestment of dividends and capital gains. Starting date chosen due to the availability of daily return data.
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