Portfolio down? Stand on the shoulders of giants to see the bigger picture

It feels like investment markets are particularly hairy right now. Let’s take a breath and a different perspective, particularly those investors who have been here before.

This is normal

Investment returns do not go up in a straight line. A simple average over, say, a 7-year period, hides the rollercoaster of truth behind a solitary number.

Here’s the per year returns from the InvestSMART Growth Portfolio, investable via an InvestSMART Professionally Managed Account, since 2015:

To get to the number at the end of table – the 6.97% annualised return - you need to hold through all the difficulties of 2016, 2020 and 2022.

But even this table hides the truth of it. During 2020, the portfolio experienced a decline of 11.2% in March. Holding through such periods is how you get to the number at the end.

Control your emotions to maximise your returns

This is harder than it sounds. As our own Alan Kohler said during peak COVID hysteria, “Panicky behaviour, both buying and selling, is the enemy of good returns. We’ve all read it and I have learned it from bitter experience.”

United States research house Dalbar has been conducting a study on investors' returns for almost 30 years. It concludes that the average investors’ returns are worse than the fund they invest in. Why? Because they either add or withdraw funds at the worst possible times.

The study found that people are most likely to put money in when they are feeling good (top of the market) and withdraw when they are feeling miserable (bottom of the market).

We suggest doing as legendary investor Jesse Livermore says, “It was never my thinking that made the big money for me. It was always my sitting.”

This will mean controlling your emotions whilst looking at your account and reading the media headlines. Our friend, Phil Bish has some comments on how to best handle the “availability bias” associated with the news.

This time is different!

Every new macroeconomic event comes with its own unique set of worries. But if we look back at these issues, we see a similar trend.

A great tool to help put events into perspective is Vanguard’s annual index chart where they overlay Presidents, Prime Ministers, natural disasters, wars, and economic collapses. This link will show you the chart up to 2021.

It is not easy seeing your account showing negative returns. But with perspective, a cool head and understanding how investments perform over time, you can weather the storm of markets and emotions. Sometimes, doing nothing that all is the best thing to do.