We have some simple core beliefs that drive all of our investment advice.
- Markets are efficient. Over the long term, assets are priced at their true value and behave "the way they're supposed to." Bonds don't act like stocks and suddenly "shoot through the roof" or have the "bottom fall out" of them, and stocks don't suddenly become a "safe harbor in a storm."
- Markets are volatile. Not "can be" or "might be." Are. And this is a good thing. It's the volatility in markets--adjustments to short-term inefficiency--that drives their growth, not just the inevitable episodes of retreat. Without volatility, there is no growth in a market that makes investment worthwhile.
- Investing is inherently a long-term activity. But because of markets' tendencies to sometimes retreat--and maybe rapidly so--investing for the vast majority of us is properly done with a long view. If you're saving to make a down payment on a house in two years, for example, then save it. Savings belong in savings accounts, money market accounts, or maybe certificates of deposit, but not in markets.
- The primary difference between investing and gambling is a plan. Ezra Solomon said it best: "The only function of economic forecasting is to make astrology look respectable." This applies to markets, but especially to investing in any individual security. And because of this, we believe there's no such thing as a proper investing plan that doesn't include broad diversification. In the words of Nick Murray, "If you own enough of any one thing to make a killing, you own enough of it to kill you."
- The primary difference between volatility and risk is your behavior. Volatility is always with us. Markets go up, and markets go down, and sometimes rapidly enough to make us uncomfortable. But if you make hasty decisions in response to market fluctuations, it's quite easy to do inadvertent financial harm to yourself. But if you've properly planned to invest for the long term, your plan will account for these short-term fluctuations. And then you'll have positioned yourself--ahead of time--to make good decisions. Even if that decision is to do nothing.
- Your behavior is a better predictor of your success than markets are. With all of the above understood, and with a plan that incorporates all of it, the last piece is sticking to your plan. This doesn't mean the plan won't ever change. In fact, it will likely change fairly constantly throughout your life. The critical piece, though, is that your plan change in response to how your life changes and not based on what markets--which are bigger than all of us and which none of us can predict--do.