I hope you're enjoying the holiday weekend. I've just been laying low, getting accustomed to the sleeping patterns of a 13-day-old baby, and, of course, writing out some thoughts around Three Things that stood out this week. Enjoy!
PDF: Recent Market Volatility
Dimensional Fund Advisors
Early in my career, prior to founding Harding Investments & Planning, I’d overheard a fellow advisor say during a particularly volatile period in the markets “Our clients expect us to do something, what moves should we make?” While I understand where my peer was coming from, I strongly believe any plan for managing volatility should be created in advance of volatility, not during it…The plans people make in the midst of chaos are rarely good. After all, we don’t decide to create an evacuation plan for a building on fire after that building goes up in flames.
When faced with market volatility there can be a tendency to want to make adjustments to your long-term plan. In practice, adjustments to any plan should only be made if your life and your investment purpose changes.
Two weeks ago I shared a video to address Recent Market Volatility; attached is an article with some of the same message, but with a bit more data to support the narrative.
Key Takeaway: This article contains a super interesting analysis what happens to S&P 500 Index performance when we miss the best trading days in a year from 1990-2018.
The annual compound return for the entire period: 9.29% per year
Missed 1 Best Day Each Year: 8.87%
Missed 5 Best Days: 7.75%
Missed 15 Best Days: 5.79%
Missed 25 Best Days: 4.18%
(best = highest daily increase)
This is the case for not jumping in and out of markets because we can’t know when the best/worst days are coming…. And while these numbers assume that someone jumping in and out would have the worst possible timing, the numbers also don’t account for the added trading costs and tax issues that can arise from making frequent adjustments.
Simply put, volatility is normal and saying “This time is different due to ______________” is a dangerous practice which can lead to costly adjustments.
If the urge to make a change is overpowering, consider a slight step in a more conservative or aggressive direction to appease an emotional reaction. A slight adjustment may quench our thirst to adjust things, while not also putting our longer term plan at risk.
Article: Neuroscience Says This is the Most Powerful Way to Reward Yourself
The study of incentives is interesting to me, particularly as someone who considers themselves an economist (a title which, to my knowledge, is something you can earn by just deciding to call yourself one).
Building and maintaining wealth often comes down to establishing the right habits; and the right habits often are formed through positive reinforcemenT (incentives).
This article discusses how to reward yourself, or others, to achieve the most affect.
When incentives are predictable, their affect can become dampened. Consider an employer that always gives Christmas bonuses to employees; after the first couple years of that reward, its impact on the employee is lower.
The brain, it turns out, LOVES randomness and produces dopamine in response to random stimulus. This is why the riches of Las Vegas exist; everyone understands that gambling is a mathematically-inept practice, yet they still do it. The rush comes from the randomness of when the slot machine will actually pay out.
The Related Dating Tip You Didn’t Ask For:
Flowers & chocolate on Valentines Day are predictable. ..Try some random thoughtfulness and see how it works out ;).Maybe I'll get my wife a lavish bouquet for Columbus Day (Oct. 14) just to catch her off guard. Stay tuned.
Link to Article: https://www.inc.com/wanda-thibodeaux/neuroscience-says-this-is-most-powerful-way-to-reward-yourself.html
LinkedIn Post w/ Video: Pain + Reflection = Progress
Ray Dalio runs the largest hedge fund on the planet, and his wisdom about business and investing is invaluable. His book Principles is quickly becoming mandatory reading for new management professionals.
In this LinkedIn post, he discusses one of his "Principles": the natural relationship between pain and progress. https://www.linkedin.com/posts/raydalio_there-is-no-avoiding-pain-especially-if-activity-6571740111602503680-g5b5
The first line of the post is the key: "There is no avoiding pain, especially if you’re going after ambitious goals."
If you're receiving this email, then odds are you either are extremely ambitious or you've already achieved goals through sacrifice... So a lot of this is preaching to the choir. Still, it can be useful to revisit the principle.
Related: If you haven't watched Dalio's 30 Minute video "How The Economic Machine Works", I highly recommend it. Here's the link: https://www.youtube.com/watch?v=PHe0bXAIuk0
That’s all for this week. Happy Labor Day!