This Quarter Doesn't Matter: Financial Advisors' Daily Digest

by: SA Gil Weinreich


What’s happening this quarter, this year or this decade is not what is driving your future wealth.

David Merkel, CFA explains how very limited trading helps him maintain his unexciting, but profitable portfolio.

Oil breaks through $50 today.

Stay invested, diversify and rebalance - that is my executive summary of Kate Stalter's superb article on today's SA, "Three Ways to Protect Yourself Against Market Volatility."

I believe Kate, an experienced financial advisor, when she says that the third item - rebalancing (a fancy way of saying buy low and sell high) - is the most challenging:

Investors tend to make decisions that stem from emotions such as fear and greed. People don't like hearing this, because they believe investing is purely logical and data-driven."

Rebalancing means that the investor (or advisor) periodically go back to a pre-set allocation. If U.S. equities are supposed to be 20% of the portfolio, but have risen to 25%, and U.S. government bonds are supposed to be 20% of the portfolio but have fallen to 15%, you sell stocks and buy bonds. Simple, right? Yet, as Kate notes:

If it were that easy, wouldn't everybody just make the correct logical decisions year in and year out? Everybody would constantly be a winner in the market. Trophies for everyone."

Alas, simple as it is, few trophies are handed out as investors neglect this logical approach to planning and investing. It's hard when you're staring at the abyss to choose to accelerate your fall, which is how it feels to buy a declining asset, and ditto for reducing your proportion of winners. So try re-framing. Remind yourself that there is a well-established concept known as mean reversion. Then put this powerful force to work for you.

Even better: Remind yourself that what's happening this quarter, this year or this stock-market era - even a robust one like the late '90s - is not what is driving your future wealth so much as the fact that you are taking a disciplined, rules-based approach to investing on a monthly basis - starting from the portion of your paycheck that you never see because it gets funneled into your investing account automatically at the beginning of the month.

We all tend to get caught up in the moment, but the long-term accumulation of wealth is more about the consistent pattern of behavior you live by your whole life than the hurly-burly of bull and bear markets. Those markets fuel the growth of your portfolio by enabling you to accumulate shares cheaply in bear markets and sell expensive shares in bull markets. That's more easily accomplished by folks who are ignoring all the excitement as opposed to those who are cascading through those markets' emotional highs and lows.

Let us know your thoughts, and, here are a few links on today's SA: