Wealth Matters: Things Aesop teaches about investing

As financial planners and investment advisers, we study market trends and research, and are privy to the predictions and analyses of various pundits and experts. Ironically, some of the wisest investment advice comes from a man who had no money to call his own. Aesop the fable writer lived in ancient Greece during the fifth century B.C. and the morals of his stories give us great insight into smart investing for today’s volatile marketplace.

Slow and steady wins the race. A little thing in hand is worth more than a great thing in prospect.  Do not trust interested advice. Don’t count your chickens before they are hatched.

Before illustrating how timely Aesop’s advice is as it relates to your money, it’s important to point out that the goal of investing is to build and preserve wealth over time. Unlike a savings account (a low-risk approach to protect your money with little concern for growth or inflation), or speculating (a high-risk attempt to make a lot of money quickly), long-term diversified investing is a thoughtful, prudent way to manage wealth. It involves taking reasonable risks in exchange for the opportunity to earn higher long-term returns, and also requires short-term discipline once you’ve committed to a long-term financial and investment plan.

Let me explain how Aesop’s words of wisdom apply to every investor’s dream to beat the Wall Street pros with a consistent way to “buy low and sell high.”

Slow and steady wins the race.  “Beat the market,” speculative stock picking efforts and market timing strategies consistently make a negative contribution to return when compared to a steady, slower, disciplined approach. For the most part, these activities waste time, cost money, and don’t reward your efforts. This is not just our firm’s opinion, it’s been proven time and again by numerous academic studies.

 If you assume, as we do, that markets work and individual stock picking attempts by a manager to beat the market don’t, you can eliminate emotion and speculation from the portfolio decision process. This approach also allows investors to cut out the middleman (with the associated costs) and be rewarded with capital market returns.

A little thing in hand is worth more than a great thing in prospect. Besides higher returns, the other benefit is lower trading commissions, tax, and investment costs, which go to the middleman (e.g. Hedge fund manager who charges 2 percent of assets and then 20 percent of profits) and Uncle Sam, instead of you.

Do not trust interested advice. The media often focuses on an investment’s potential return rather than its risk But, we feel it is more important to have a good understanding of risk to make an informed investment decision. Unfortunately, there are no high return/low risk investments no matter what the "experts" tell you.

Once you understand each investment’s risks, you can focus on your desired mix of cash, stocks, and bonds. This is the single most important investment decision you will make. The reason for this is that you must know how much short-term stock market volatility you can handle without abandoning your long-term investment plan.

 There will be times when adjustments to your portfolio’s investment allocations will be beneficial. This change should not be based on a forecast, but rather on the fact that your portfolio has drifted away from its original level of stocks vs. bonds and needs to be realigned with its appropriate risk level. This is called rebalancing.

For example, if stock markets enjoy a period of strong returns, it is possible that a 60-40 stock/bond portfolio could drift to a 70-30 mix. Left alone, your portfolio will have a higher risk level at what could turn out to be a high point in the market. By rebalancing back to the 60-40 mix you started with, you can maintain your desired level of risk and expected return.Global stock markets have been very volatile since 2000, but this is not necessarily a bad thing if market swings provide trading opportunities for investors with a proactive rebalancing strategy. With such an “opportunistic” plan in place, investors can take advantage of large stock market movements on the up or down side in a disciplined way by buying stocks at low points and selling at higher points. In fact, the more the markets fluctuate, the more volatility can benefit an opportunistic rebalancing strategy and enhance portfolio returns. 

The most important point of disciplined long-term investing and portfolio rebalancing is to have a plan in place in preparation for market volatility. We expect volatility to remain high in the markets and an opportunistic rebalancing strategy is poised to take advantage of these movements. Although volatility isn’t necessarily comfortable for investors, it can reward you handsomely if handled properly.

 You can expect success with a disciplined long-term strategy but don’t forget Aesop’s advice:  Don’t count your chickens before they are hatched....

Mark Keating, Certified Financial Planner, is a partner at Willow Creek Financial Services, Sebastopol, one of the leading wealth management firms in California. For more information go to www.wcfsinc.com or call 707/829-1146. Wealth Matters is a monthly column from the firm's partners.

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