Investing behavior is rooted far beyond the surface of each person. We all come from different backgrounds, raised by different people, and have lived through our own distinct time periods. All these things and more factor into how we invest.

At the annual small talk family finance summit or what other people might call Thanksgiving; I was reminded of the challenging behavior gap we all face as we invest. In one corner, an uncle is talking about how things are about to crash. He spoke about how the national debt is going to capsize us. All his savings are in CDs. Later, outside, I spoke to another uncle, discussing blockchain and Ethereum investing. He had zero worries about our government or the most recent geopolitical issue; he was more focused on the momentum of crypto.

These two people grew up in the same household and are within 5 years of age, yet have completely different ideas in how they should invest. The point being that investing is very personal. Taking a step back to understand “the why” behind your investment, can hopefully drive how you invest.

Simplifying The Why

Consider the idea of training for a marathon. Prior to the race, you will need to start training 18 weeks in advance. Each week, you have a mix of different runs and a defined plan to ramp up to about 50 miles per week through 3-5 runs. Once you get to that point, which takes time and consistency, you are closing in on running 26.2 miles.

It is very hard to determine how to train for a marathon without understanding how many miles you need to run and the date you will run them. Even with that knowledge, running 26 miles is not easy. Goals-based training is the same as goals-based investing. Understand what the money is intended for, invest accordingly, try your best to consistently work toward that goal, and make tweaks based on your progress.

Managing Risk

“The biggest risk is always what no one sees coming, because if no one sees it coming, no one’s prepared for it; and if no one’s prepared for it, its damage will be amplified when it arrives.”

– Morgan Housel

While there will always be surprises, we want to prepare as best as we can for the unexpected. When big events move the markets, many investors have an instinctual urge to change their risk appetite. The problem is that big changes could significantly impact your long-term outcome. We have a saying that the best way to generate alpha is by mitigating risk. So, the first step to thinking about risk is understanding which factors we can control and which we cannot.

For example, while we know there will be big moves in markets, we cannot predict when catalysts for that change will take place. Managing risk by attempting to time the market can significantly impact how you compound capital. Missing out on positive days by being “risk-off” is a good way to introduce another risk to the equation: longevity risk.

Source: Aptus data as of 9/30/2023

When you exit the market, you may miss some of the downturn (if you get that timing right), but with that, you have the potential to add other risks. By spending less time in the markets you’re increasing your probability of negative returns. As shown below, the more time you spend in markets the lower the probability you have that your returns are negative in the long run.

Source: Aptus data as of 9/30/2023

In our view, investors also tend to focus too much on the short-term “noise” in the market. There is usually a great deal of variability in the day-to-day, with different economic, geopolitical, and company-specific news constantly moving markets. Instead, focus on the end goal and getting a structure in place that gives you the best chances for success.

The right structure helps you avoid making big moves that may expose you to either missing out on those best days of the year or letting your emotions of short-term noise drive your long-term investing plan.

In my first marathon, I had a little too much enthusiasm. The first-half pace was almost twice as fast as the second-half. With that, I barely finished and had to make friends with the folks in the medical tent afterward. Don’t make that rookie mistake that will deter you from hitting your goals or, in my case, barely making it on life support.

When making changes to your risk, do your best to pace yourself and avoid letting over or underwhelming enthusiasm change your behavior. That behavior can easily lead to an inconsistent risk profile and, eventually, a bad outcome.

Team Over Players

As you start to ponder how you put together your investing and related risk plan, it is important to use every resource you can. As said much better in our Team Over Players post from a few years ago, it takes a cohesive group with different skill sets that complement each other to win championships.

The resources a financial advisor has at their fingertips can be the difference-maker to staying on track with your investment plan. That guidance can be the key to avoiding emotions getting in the way of long-term goals.

The seminal 1986 study by Brinson, Hood, and Beebower showed that asset allocation decisions were responsible for 91.1% of a diversified portfolio’s return pattern over time.

If I am building a house, I want expertise in electrical, plumbing, and framing to help build a proper structure. Your team to maintain a sound structure as you invest is just as important.

In Summary

There will be setbacks. The longer your time horizon, the easier it is to handle said setbacks. Avoid water cooler or Thanksgiving chatter to uproot your investing plan. Also, remember there are no shortcuts to running a marathon.

Your risk appetite will evolve over an investing cycle, just as your goals do. Your long-term goals cannot be achieved overnight; take the small wins where you can, and how you invest will be clearer each day.

In honor of the great Charlie Munger, Let’s end with a quote from him who says it best:

“Its so simple to spend less than you earn. Invest shrewdly. Avoid toxic people and toxic activities. Try to keep learning all your life. Do a lot of deferred gratification because you prefer life that way. And if you do all those things you will almost certainly succeed. And if you don’t… You are going to need a lot of luck. And you don’t want to need a lot of luck. You want to go into a game without any unusual luck.”

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2311-20.

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His explanation was that he was in pursuit of preventing what he called the “Big Miss”. The “Big Miss” is that one bad swing that can cause a player to hit a stray tee shot that costs them the tournament, and each change Tiger made was one he hoped would eliminate the potential for that result.

From our perspective, there are two “Big Misses” in investing; the failure to stay invested, and a short time horizon. Let’s walk through both.

Failure to Stay Invested

There may be a myriad of reasons for not staying invested, but we believe it is typically an individual’s fear of a large drawdown, or an attempt to time the market. Both can be detrimental to portfolio returns and increase longevity risk within portfolios. To illustrate what can happen from the failure to stay invested, we have calculated the impact on returns if we exclude some of the best days in the market, using the best daily percentage returns for the S&P 500 Total Return Index:

Source: Bloomberg. Returns are from S&P 500 from 12/31/1927 through 08/31/2020 with reinvested dividends.

Since the start of 1928, there have been 23,292 trading days with a cumulative total return in the S&P 500 of 450,259%. This an exceptionally large and difficult number to comprehend, mostly due to the extended time horizon that is much longer than the average investor’s. To help put into perspective, if you had invested $10,000 at the close on December 30, 1927 and not touched it, you would now have roughly $45,035,878.

If you had missed just the 10 best days in the market, a mere 0.04% of trading days, you would only have $14,920,820. That is a whopping $30 million less from missing just the 10 best trading days! It logically continues to get worse as you exclude more of the best days. For example, if you missed the top 100 days, only 0.43% of total trading days, you would only have $78,929, more than $44 million less than if you had stayed invested.

We would be remiss to not mention the exclusion of the worst market return days. Avoiding large down days can have major positive impacts on your portfolio, but the ability to time these is difficult, and often some of the best days in the market are during large bouts of volatility. In our opinion, it is much easier to invest in strategies that help to keep you invested, and avoid the “Big Miss” of not benefiting from the best return days that can cost investors thousands, and possibly millions of dollars over time.

Short Time Horizon

In our view, investors also tend to focus too much on the short-term “noise” in the market. There is usually great deal of variability in the day-to-day, with different economic, geopolitical, and company-specific news constantly moving markets. We believe the best method for loss avoidance is to expand your time horizon. Let’s take another look at the numbers:

Source: Bloomberg. Returns are from S&P 500 from 12/31/1927 through 08/31/2020 with reinvested dividends.

As the chart illustrates, you have roughly a coin-flips chance of losing money on any given day. Based on our calculation, your odds of losing money continue to decrease from there as you expand your time horizon. Less than 7% of rolling 10-year data points are negative in total return, and only 0.11% of rolling 20-year periods. There is just one time since 1928 that over a 20-year period you failed to make money when holding stocks.

From our perspective, failing to look through the short-term noise in the markets is akin to abandoning your golf round after one three-putt. In investing, as in golf, we believe the best method for loss avoidance is to expand your time horizon to tilt the odds in your favor for success.

Conclusion

Investor behavior is exceedingly difficult to change. We believe the numbers are clear, but these are complex behavioral and financial decisions. Studies that have expanded on Kahneman & Tversky’s 1979 piece on “loss aversion principles” suggest that the psychological pain investors feel from a loss is twice as strong as the joy they receive from a similar size gain.

We believe Aptus’ approach closes this psychological gap with disciplined Drawdown Patrol Investing, a suite of proprietary funds that complement a globally diversified portfolio. The funds seek to avoid large drawdowns and keep pace in up markets, creating a compelling long-term investment solution. By staying invested for the long-term, individuals can potentially avoid those “Big Misses” in investing.

Disclosures: 

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase of sell any particular security. Forward looking statements cannot be guaranteed.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment and tax professional before implementing any investment strategy.

The S&P 500 Index is the Standard & Poor’s Composite Index and is widely regarded as a single gauge of large cap U.S. equities. It is market cap weighted and includes 500 leading companies, covering approximately 80% of available market capitalization.

Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. More information about the advisor, and its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. The Funds are distributed by Quasar Distributors LLC, which is not affiliated with Aptus Capital Advisors, LLC. The information provided is not intended for trading purposes and should not be considered investment advice. Please carefully read the prospectus before making an investment decision. ACA-2009-20.

The post The Big Miss – Golf’s Connection to Investing appeared first on Aptus Capital Advisors.

Two background items to set the stage:

First stage setter – the general perception is a financial advisor’s value lives in their investment acumen.  For some, maybe.  For most, it’s not the case.

That’s not a bad thing and not a knock on anybody. As we said in our last post, the best financial advisors are the ones that spend their time with clients to think and communicate through financial planning issues of all shapes and sizes.  They simplify the complex, shift focus to the things that matter, and facilitate control of the controllables. That’s a demanding job.  The investing component is just that, a component.

To summarize our first stage setter – the value of a financial advisor shouldn’t be positioned as an investment guru with the ability to pick the best stocks, managers, strategies, etc.

Second stage setter – We believe a solid investment approach, that is stuck with, produces better outcomes than the revolving door of chasing the best.  Advisors should strive to be solid and sticky.

Back to the matter at hand – performance chasing

When it comes to finding a third-party investment resource, advisors are bombarded with material now.  Everybody and their mom and then her mom offers models.

Feel free to read any methodology paper and it’s sure to highlight their intellectual capabilities with phrases like this, “meet our team of PHDs” or “built upon Nobel prize winning research”, and without a doubt, they will use fancy words and phrases, “efficient frontier, mean variance optimization, Monte-Carlo simulations, etc”.  It’s all in effort to convince you their HOW is better even though the lifeblood of your client base doesn’t give a crap.

If you want to waste time – go find the best HOW.  No matter your measurement for best (which is an infinite loop itself), your quest will never end.  As soon as you find the best – the best changes.  That’s how it works in the investing world, different styles and approaches to portfolio construction will ebb and flow in and out of favor.

Find what is sufficient, dig in to make sure methodology is sound, gain an understanding, and allocate your time and energy towards the things that truly impact your clients.  If the how is solid, the market will take care of the rest.

Closing

The investment approach is far less important to the financial success of your clients than everything else.  Your allocation of time and energy should reflect that.

Our hope is that we can make a dent to diminish the natural tendency to want to chase the next best thing.  We believe we have designed our investment offering, relationship, and all that comes with it, to produce the margin needed that facilitates “everything else”.

We want to wrap our advisors in an environment of unmatchable service, superior economics, and consistent communication that facilitates an understanding of what matters and what does not at the client level.  We want to re-frame and re-position the portfolio discussion as a part of the meeting, not the meat of the meeting.  We want to pull them out of homing in on the things that cannot be controlled to the things that can. That’s what narrows client’s focus to the important stuff, and levels out the field of accountability.   It’s the creation of this environment that excites us most, our investment piece is just a component.

If you use us, great.  If not, that’s great too – there are plenty of HOWs out there that are more than sufficient. A solid HOW, that’s stuck with, is far better than performance chasing.

Conviction in process, and the understanding required to gain that conviction, directly improves potential outcome.  Do the work now to prevent the drag of ongoing and unending performance chasing.  Keep in mind, simple beats complex.

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