Friday, July 29, 2016

Investing is a lot like Gambling…

Pathways Advisory Group, Inc.
Dustin J. Smith, CFP®

Entering a casino, most people feel a sense of excitement about what might happen.  It’s an electric feeling.  Whether it’s craps, blackjack, poker or slot machines, everyone has a chance to win big.  Once the winning starts, it seems contagious.  The crowds grow quickly.  On any given day, luck can get the better of the casino.  I imagine they lose big certain days, months, maybe even particular years.  At the end of the day, investing is a lot like gambling, but not in the way you think.

Investment results on a daily, monthly or annual basis are anybody’s guess.  Returns are unpredictable and, at times, fickle.  Markets will test your resolve.  But, like the casino (not like the gambler), the odds play out in your favor over time.  Investors, like the casino, have to accept the risk of short term losses.  Investors, like the casino, accept this risk because of the odds.  Investors, like the casino, have reason to remain calm.  The house, like the patient investor, always wins!

The investor’s odds are driven by capital markets.  Equity markets rise more often than they don’t.  In most years, stocks outperform bonds.  Value stocks typically outperform growth stocks.  Highly profitable companies tend to outperform similar less profitable companies.  And, when small stocks outperform large stocks, it’s not close.  Good small company returns come in bulk.  With a portfolio designed to capitalize on these factors of expected returns, the deck is stacked heavily in the investor’s favor.  Daily, monthly and annual results will be noisy, just like casino profits, but the rewards will come with time.  All it takes is (lots of) patience!

Speculation (trying to predict the market and capitalize on that prediction) is a lot like gambling.  You may win big on occasion, but it’s only a matter of time until the odds catch up with you.  Investing, with the kind of discipline and factor-based diversification described above, is a lot more like running a casino.  For both the casino operator and the long-term investor, it’s only a matter of time until the profits pile up!    

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Friday, July 15, 2016

The Dow just ain’t what it used to be…

Pathways Advisory Group, Inc.
Dustin J. Smith, CFP®

There has been lots of talk lately about the June 23rd “Brexit” vote (the UK’s decision to leave the European Union) and the possible repercussions.  Michelle touched on it with a blog post and this month’s newsletter article.  It’s a major geopolitical event that will take a while to play out.  What caught my eye, after the dust settled from that day, was something a bit more subtle.  Let me explain.

On October 6th 1987, the Dow dropped 92 points from 2,640 to 2,548.

On August 4th 1998, the Dow lost 300 points from 8,787 to 8,487.

On September 22nd 2011, the Dow declined 391 points from 11,125 to 10,734.

And finally, on June 24th 2016, on news of the historic “Brexit” vote, the Dow dropped 610 points from 18,011 to 17,401.

What do these four dates have in common?  They look different but represent very similar 3.4% to 3.5% single day declines.  A 3.4% or greater decline isn’t as newsworthy as you might think.  It’s happened fifty-nine times with the Dow since October of 1987.  What’s more newsworthy, to the long-term investor, is that a Dow of 17,401 (a Dow of 18,506 as of the date of this post) was a Dow of 2,548 just 29 years ago (and that doesn’t include dividends). Not a bad return for all of your troubles!

The Dow just ain’t what it used to be… it’s actually quite a bit more valuable now.  Wonder what it’s going to be like to stomach a 3.4% decline of 1,200 points with a Dow of 35,000?!

Despite all the breathless headlines…

Disciplined investors are rewarded….

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Data exported from historical DJIA prices. All references to the “Dow” above are to the Dow Jones Industrial Average (DJIA).  Past performance is no guarantee of future results.