Do you follow March Madness? I do — it’s a great spectacle. In case you don’t, “March Madness” is the nickname for the annual men’s college basketball tournament which – as you may have guessed – occurs each March. It’s a single elimination tournament that consists of 68 teams. One of these teams is crowned number one in the nation. It used to be made up of 64 teams (a pleasing and sensible power of 2) but was expanded to 68 teams in 2011. After all, this is America, and more is better… presumably.
Why “Madness?” Well – each year, you can count on it. Madness, mayhem, and unpredictability. Teams that no one believes can compete upset the favorites, last second shots win the day (or clang off the rim.) Spirits are exuberant on one side of the court and broken on the other.
It’s a lot like the stock market, if the stock market were a spectator sport. Oh, wait — it is, isn’t it?
Volatility doesn’t mean the stock market is “bad”
So, I had someone ask me if my job is difficult these days because the market was “bad.” Let’s all take a break and reflect on that for a moment while we ask the one of the best minds of the 20th century for a little perspective.
“Reference frame is all” — Albert Einstein
Framing expectations for investing long term
I used to spend a lot of time trying to convince people that volatility in the stock market, compared to a “bad” stock market, are not one and the same. I think that is called “whistling in the wind” or “tilting at windmills,” and I’ve lost my fire for those discussions. Many financial advisors I know have lost clients that were upset because they lost value in their portfolios when the markets declined, or those who didn’t gain enough value when the markets were up. In some cases, these were the same clients.
Part of my job as a financial advisor is to assist in framing expectations. This is a challenge. To predict the future is difficult. Doing this as an advisor in any way that hints of a guarantee of market performance is absurd, not to mention unethical and outright illegal.
Maximizing chances of a favorable return over time
However, it is not unreasonable to expect your investments — if selected wisely, monitored annually, and left the devil alone for the most part — should give a favorable return over time. By “over time” I mean 10 to twenty years at minimum, and by “favorable” I mean one that is in the ballpark of your well thought out financial plan.
“Should I buy this stock?”
Here’s a real-world story to explain this principle. A client called me and asked if they should buy a certain security. I looked at the research (which was somewhat ambiguous) but overall leaned toward favorable based on my analysis. I told the client that yes, I thought this blue-chip buy was a sensible value investment if they were willing to give the company three years at least to experience a turn-around. The client called the next week and directed me to sell the position because it had dropped another 3 to 5 percent in value.
As Strother Martin famously intoned in Cool Hand Luke, “What we have heah, is a fail-yuh to communicate.”
Leave the madness to basketball
The lesson: mayhem is better suited to physical sports than to your investment portfolio. Let’s leave the madness on the courts!
- Work with a qualified financial advisor, keeping clear lines of communication open!
- Be clear on the expectations for your portfolio, your risk exposure for the short term and the long term, and market performance/volatility.
- Monitor your portfolio with an eye towards managing volatility with the goal of long-term growth to your planned targets.