As uncouth as it may be, worrying about one’s investments seems to be the order of the day. And it’s no wonder. As the markets careen to and fro, publications are replete with stories of advisors and Wall Street pros dumping their stocks in favor or bonds and cash as they scurry to the sidelines.
And, as usual, the average retirement investor feels caught off balance and a few steps behind the curve. What is the ordinary investor to do? It does feel a bit like 2008 again, doesn’t it? Is it too late to take a cue from the pros, pull up stakes on a long-term investment mentality and find a nearby bunker to hunker down in with a bag of bonds now returning less than the rate of inflation?
At times like these, simple positive thinking doesn’t seem to extract the thorn of worry from the back of the investor’s mind. As much as he conjures up Bobby McFerrin’s “Don’t Worry Be Happy” chorus or hums a bar of “Hakuna Matata,” the worry seem to still creep in at unexpected moments like a terrible and relentless rot.
Investment anxiety, however, can be tamed. They key is having a clear understanding of those things that should and should not be on your list of worries. Let’s begin with what not to worry about – the direction of the markets.
I Don’t Know and I Don’t Care
The famous financial columnist, Jason Zwieg, once wrote powerfully about how index investing liberates the investor from the anxieties of trying to predict market movements. His words from 2001 are as relevant today as they were then:
Indexing enables you to say seven magic words: “I don’t know, and I don’t care.”
Will value stocks do better than growth stocks? I don’t know, and I don’t care – my index fund owns both. Will health care stocks be the best bet for the next 20 years? I don’t know, and I don’t care – my index fund owns them. What’s the next Microsoft? I don’t know, and I don’t care – as soon as it’s big enough to own, my index fund will have it, and I’ll go along for the ride.
Indexing enables me to say, “I don’t know, and I don’t care,” liberating me from the feeling that I need to forecast what the market is about to do. That gives me more time and mental energy for the important things in life, like playing with my kids and working in my garden.
When it comes to worrying, one should only worry about what he or she can control. Although countless have tried to control the public markets through worry filled hours of mental consternation and sleepless nights, markets rarely, if ever, obey. Therefore, the current vagaries of the market need to be ignored in exchange for the science of long-range planning based on hard, cold investment facts. It may seem like the world is falling into a hole, but investment science indicates otherwise.
Those who have the courage to ride the markets through the ups and downs, holding their course over decades, will be handsomely rewarded.
I Do Know and I Do, In Fact, Care
There are some aspects of investing that, in fact, are worthy of serious retirement investor’s attention. Two elements within the intelligent investor’s control are asset allocation and investment costs.
While millions of Americans tune into Jim Cramer’s Mad Money to watch him race about with his shrieks, squeaks and squeals, proclaiming what stock to buy or sell, the intelligent investor understands that the research is conclusive – 90% of investment returns are rooted in asset allocation, not stock picking. Therefore, the intelligent investor focuses his energy on identifying six or seven asset classes, with as little correlation as possible – U.S. equities, foreign developed stocks, emerging markets, commodities like gold and energy, real estate investment trusts, inflation-protected Treasuries, bonds and possibly more.
The investor then works carefully to identify, based on his risk tolerance, time horizon and other factors, the appropriate mix of theses assets classes for his portfolio. Once the portfolio is constructed, the investor rigorously maintains his allocations over the years, making adjustments only when his needs dictate a need for investment policy changes – not because Cramer bonked his bonker or because of any other market madness.
Finally, the intelligent investor overcomes investment anxiety by driving all unnecessary investment costs far from his portfolio. While market movements cannot be controlled, costs can be. Therefore, the investor makes sure to use low cost index funds and ETFs as essential building blocks for a diversified portfolio. Instead of paying one to one-and-a-half points for mutual funds the intelligent investor is able to achieve global diversification for around one fifth of one percent annually.
Additionally, by removing all unnecessary intermediaries that stand between the investor and his money, agency risk is dramatically reduced. The investor no longer needs to fret that some money manager is going to go AWOL with his retirement dollars or that he is going to become an unwilling participant in the next episode of the ongoing Wall Street saga of investor meets crook.
Like Wilkie Collins, the famous English novelist, once said, “Peace rules the day when reason rules the mind.” By accepting your inability to control or predict the markets, and embracing your ability to drive down fees and construct wise allocations, you too can shirk Wall Street madness and say goodbye to investment anxiety.