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Success of the Last Dumb Buyer


Dear Investor,

The recent fall in the markets may have many of us wondering if we’ve done something “dumb.”

In thinking about this, I decided to calculate how terrible the performance has been for the poor souls who put all their money into the markets just before the 2008 market crash – perhaps the “dumbest” time to invest in the last 15 years.

That investor went all-in on October 9, 2007 when the S&P 500 was at 1,565. 

But how dumb was she?

If she held on from that date until January 2, 2019, when the market closed at 2,510, this poor investor would have earned a 60% return in price only (not including dividends), even after the 20% drop during late 2018.

This works out to a return of 4.3% per year.  However, if we add dividends, which have paid about 2% per year during this time, this investor earned a respectable 6.3% per year bringing the total return to nearly 100%. 

That’s not bad for the dumbest investor in the last 15 years!

But being a dumb buyer is much better than being a dumb seller.

Our last dumb seller – the person who sold all their stocks at the bottom of the market in March of 2009, has given up a return of about 16% per year or about 336% of her original investment!

If even the dumbest investors perform so respectably then can we say we at least want to be the dumbest buyer and always avoid being a dumb seller? 

At this point, it is worth restating my overall philosophy of investment advice.It is goal-focused and planning-driven, which is quite different from an approach that is market-focused and current-events-driven.

Every successful investor I’ve ever known was acting continuously on a plan.  Failed investors, in my experience, get that way by reacting to current events in the economy and the markets.

I neither forecast the economy nor attempt to time the markets.  I’m a planner rather than a prognosticator.

Once a client family and I have a plan in place – and have funded it with what have historically been the most appropriate type of investments – I’ll hardly ever recommend changing the portfolio as long as their long-term goals haven’t changed.  I’ve found that the more often investors change their portfolios (especially in response to the market fears or fads of the moment), the worse their long-term results.

In summary, my essential principals of portfolio management are:

  • The performance of a portfolio relative to a market benchmark is irrelevant to long-term financial success.
  • The only benchmark we should care about is the one that indicates whether you are on track to accomplish your financial goals.
  • Risk should be measured as the probability that you won’t achieve your goals.
  • Investing should have the exclusive objective of minimizing that risk.

Wishing you good portfolio health,

-Joe

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