Warren Buffet, chairman and CEO of Berkshire Hathaway, has referred to investing as “simple but not easy.” What makes it so simple is that the best strategy is making regular contributions to your investment accounts. However, the difficulty comes with following through with that strategy. This is due to outside noise in the investment world and watching the volatility of the market day to day. This market volatility is precisely why it is essential to diversify your investments and make regular contributions.
The first reason for this difficulty is you do not know what the winning sectors/stocks will be this year or in the coming years. An example would be investing in Global Real Estate stocks (GRE). In 2004, 2005, and 2006, the annual return for investing in GRE stocks was 36.56%, 14.84%, and 40.26%. It was leading all asset classes for returns. However, the following year, after that return of 40.26%, Global Real Estate had an annual return of -7.27% in 2007. When we see it rising, it is a human tendency to want to ‘hop on’ a sector or stock. Having a well-diversified portfolio gets you exposure across many different sectors to reap the benefit of the rising & thriving sectors while limiting the risk with your investments. I say limiting risk because of the fact that if a certain sector of stocks is having a rough year, you are invested in other sectors that may be having a great year. Just as Ecclesiastes 11:2 says, “Divide your portion among seven, or even eight, for you do not know what disaster may come upon your land.” This is why Dave Ramsey recommends investing in the “4 categories” of funds and why that is what you will hear when you meet with an Advisor on our team.
The second reason for this difficulty is the market's volatility, which causes many investors to steer away from their investment plans. As I mentioned, consistently contributing to your investments is the most important and effective thing you can do. It sounds almost too simple. What makes it not ‘easy’ is how the stock market gets us our rates of return.
This chart is an excellent illustration of the nonlinear path of total returns. The red dot illustrates the lowest the S&P 500 index dropped during that current year, and the blue bar shows the total return for that year. If you look right before the year 2000, you can see that despite the stock market dropping -19% at a point throughout that year, the total return on the year was still a positive 29%. The year 2020 was a challenging year for a lot of people. In 2020, the stock market had a dip of 34%, but by the year's end, the total return was still a positive 18%. Emotional investors often miss out on potential gains as they want to get out of the market when they start seeing red.
The Positives and Negatives – and all the emotions in between
The stock market is positive 80% of the years and negative 20% of the years. If you look at the market even closer, each day it is positive about 53% of the time and negative 47%. Talk about an emotional rollercoaster. The variation of peaks and troughs is challenging to see through sometimes. However, stepping back and seeing an aerial view of the data helps give some understanding of the market's erratic behavior and why we must diversify and consistently invest.
In conclusion, spreading out your investments to encapsulate many different sectors allows you to minimize the risk that comes with a down market while also benefiting from the gains in multiple sectors. Whitaker-Myers Wealth Managers ensures that our clients are well diversified in smart funds that are run by a strategic process. If you want to schedule a meeting with an advisor to learn more about Whitaker-Myers and how we approach investing, click here. We take pride in having the heart of a teacher and would love to answer any questions you may have.