Investment Risk = Future Regret…and a Few Other Investment Maxims

1.  “Risk and Regret.”— Behavioral scientist, Daniel Kahneman, once said an important part of becoming a good investor is having a well-calibrated sense of your future regret. You need to accurately understand how you’ll feel if things turn out differently than you hoped. Similarly, financial writer, Morgan Housel, wrote a great piece about this subject earlier this year: “Regrets are a dangerous liability because their final costs are often hidden for years or decades. And decisions that are easiest in the short run are often the most costly in the long run.” He goes on to say, “Maybe regret is the best definition of risk because risk isn’t how much money you might lose; real risk is the regret that might come years or decades later.” 

In short, too many investors made the “easy” decision last year to exit the markets. At the time, it may have felt good. But did they get back in? If not, will they come to regret the returns they missed by falling short of their long-term investment goals? You do not have to be an exceptional investor to achieve any reasonable financial goal, BUT you sure must be able to avoid significant mistakes like exiting the markets when they are already in a bear market. 

2. Bear Markets are temporary. Although we just exited one of the longest bear markets in history, the average length of a bear market is under 10 months. In contrast, bull markets average over 2.5 years; and during the last 100 years, the market has moved higher (on average) 3 out of 4 years. Contrary to popular belief, bear markets are not what investors should fear the most. The real risk is how the investor behaves during the bear market. 

3. Focus on putting the odds of investment success in your favor. Avoid market timing; investors who try to avoid bear markets, must be right twice: first, when to get out; second, when to get back in. Getting both moves right is nearly impossible for most investors. Second, keep the internal costs of your investments efficient: limit your exposure to actively managed funds. Over the last 20 years only 17% of them have beat their benchmark. Third, stay diversified; a truly diversified portfolio will deliver superior returns over time, but it is critical to stay diversified and not exit solid investments due to short-term underperformance. Lastly, invest for dividends and dividend growth. Importantly, from 1930-2022, dividend income has accounted for over 40% of the total return of the S&P 500. 

4. Discipline. Again, investor psychology is such an important factor in the financial markets. Seek to outperform your own financial goals, not some random index.  And what strategy or investment may be best for someone else, may not be appropriate for you. Listen and learn as much as you can about investing and the markets, but—much like medicine—come up with your own prescription for what will work to meet your own objectives. FOMO (Fear of Missing Out) is a real phenomenon. But you should resist the urge to follow the current investment “fads” that will not benefit you in the long-term. Remember, most market pundits and many market professionals have their own agenda, and it is likely that this does NOT coincide with your best interests. “Smart money” is often not always so smart.  

5. The economy and the stock market are not the same. Too often investors conflate the two, when, in fact, they often can act very differently. The stock market is a leading indicator to the economy; that is, what is happening “right now” in the economy has most likely already been discounted into stock market prices. The financial markets are always looking forward 6, 9, 12 months ahead.

Additionally, because low-cost ETF’s have already eaten Wall Street’s lunch (on charging high fees!), it seems the selling pressure and fear mongering from many investment professionals is as strong as ever these days. However, while it does no harm to consider all points of view, it is essential that each individual build an investment plan that suits who they are as an investor. Such a strategy does not have to be complicated, but it should be comprehensive to their own situation.   

In summary, investors will always feel outside pressure from social media, friends, family and/or co-workers to follow a certain stock or investment strategy in the short-term.  How many of us heard a friend say at a BBQ this past weekend, “I am making so much money in ABC stock!” I bet a fair share. Then think about the BBQ’s in the summer of 2022- anyone tell you how much money they were losing in that ABC stock?

One final thought: 

Embrace the product innovation on Wall Street. There has never been a better time to be a long-term investor as the available investment toolbox has never been bigger! Even though much of this new “innovation” probably does not revolve around strategies/funds that we would recommend, there is no question that we have found some great unique strategies launched over the last several years that previously were not available to individual investors. Just like anything else though with investing, you must do your homework. Remember sales quotas must be met on Wall Street so you have a lot of conflicting agendas to navigate through.

As always, please feel free to reach out to us with any questions/comments you may have.

We hope you are enjoying your summer!

All the best,

NCM Capital Management

Disclosures: This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of NCM Capital Management, LLC and are subject to change at any time based on market and other conditions and NCM does not undertake to update or supplement its newsletter or any of the information contained therein. Past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. There is no guarantee that the investment strategies discussed above will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services.  For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV.