Theus Wealth Advisors Maryland

As an Investor, Are You an Andy or a Barney?


Markets were volatile in the first week of 2016 to the chagrin of some and delight of others. Count me in the camp of those delighted with volatility because I believe volatility is not the boogie man or the monster under the bed. Far from it! Volatility is to me an ally that creates opportunities for patient investors to profit from the actions of others letting emotions get the better of them. Rather than drifting with every new wind, I’ve chosen a portfolio design with attributes that seek to benefit from volatility while remaining diversified as a way of managing risk. And I stick with it. While others wring their hands over the latest “crisis,” maybe last year Greece and this year China, or oil prices “too low” from a perceived oversupply not so many years after worries of “peak oil” and fears of shortages, I stick to the same plan I’ve had for years that allows me to sleep soundly and doesn’t require me or anyone else to try and predict the next turn in the market since that’s so often a fool’s errand. But you may wonder why I don’t worry, why I even relish times like these.

Becoming a smarter investor means not letting the emotional part of your brain wrest control of your portfolio from the cognitive part—the logical part. I’m reminded of the TV classic, The Andy Griffith Show. Think of the cognitive part of your brain as Sheriff Andy Taylor and the emotional part as Deputy Barney Fife. I apologize to anyone unfamiliar with the series. Suffice to say, Andy is calm and methodical while Barney tends to be a loose cannon. Barney is ready to go off in any new direction, and frequently does, which requires Andy to reel him in before he gets into too much trouble. There’s a tendency with many investors to want to “do something” when markets are either going down or your portfolio is not going up as much as you think it should. This tendency toward being reactive, chasing recent trends, getting bored, jumping in and out of markets or changing strategies tends to be counterproductive at the least, and sometimes disastrous. Want proof?

Some of the most thorough studies of investor behavior are those done by DALBAR Research. Their most recent study of investor behavior found that from 1985-2014 the average equity fund investor earned a paltry 3.79% overall annual return while the S&P 500 over the same period delivered an average annual return of 11.06%. So investors who simply used a low-cost S&P index fund far outperformed the average investor as long as they remained invested and didn’t allow their emotions—fear or greed—to get them off the path. Of course, it was a ride that had double-digit down years as well as double-digit up years. The trouble is that I’ve never found anyone with a long-term track record who knew ahead of time which were going to be the up years. I see many who miss most or all the up years by remaining on the sidelines in money markets or fixed funds. They’re proud of missing down years but seem oblivious of the fact that they may be losing considerably more money from staying out of markets in the long-term than the occasional market downturn. And many tend to fall behind in terms of the buying power of their dollars after factoring in inflation, which is there whether they factor it in or not.

So what will China do? What will oil do? Who will be the next president? If you’re investing, or not investing, based on those questions, I suspect your long-term performance is sub-par, at best, when examined under the cold logic of a portfolio analysis and implementation meant to help you become a better investor. Do you want to be like Andy or Barney?

True Peace of Mind requires calm discipline, a long view and the right portfolio.