The stock market in 2015 has been less-than-stellar, delivering slightly above 0% return before investing fees and taxes are considered. Coming on the heels of five years of amazing returns since the devastating 2008 drop, we’re back in the role of reminding people that markets don’t always go up. Yes, sometimes market-based investments lose money and nobody enjoys it.
In true Back To The Basics form, let’s revisit the fundamentals of investing in risk-based assets. First and foremost, investors earn a positive rate of return over long periods of time precisely because money is placed at risk. Without risk of loss, whether temporary or permanent, there is no reward to be offered. Said another way, if investors are not losing money from time-to-time, there is no basis for earning a return at all. The return is the reward for having the guts to take the risk and occasionally losing money.
Because markets are inherently risky, there will be times when account values are down. That’s actually a good thing. How so? If markets always rose in value, there would be no reason compelling enough to keep everyone from investing all they have. As such, the “scarcity” of positive returns leads to a premium paid to those who are courageous and patient enough to risk their money to grow it.
When markets are down then, investors would be wise to see the decline for what it is: the washing out of those who lack the patience to remain invested for better days. Conversely, when the market is up, investors are receiving their reward for remaining steadfast in their commitment to long-term wealth building. This leads us back to the original question:
To what do we attribute an investment portfolio’s performance?
Is the portfolio’s performance due to the money manager, who should either be applauded or criticized? Is it the fund family, or the advisor, or the weather? In reality, all of these factors play a part. But ultimately, an investment portfolio’s performance, good or bad, can be attributed to the willingness of the investor to remain patient and to remain invested.
While we may be in a post-rebound, lower-performance era in the markets, remaining invested will ultimately pay dividends (in many cases literally) to those who remain committed to their investing strategy.
“Look at market fluctuations as your friend rather than your enemy;
profit from folly rather than participate in it.” – Warren Buffett