Nobody is in the position to predict where financial markets are heading. Still, people try to or listen to people who say they can. But this is nonsense and those opinions are worth little to nothing.
We all know that historically over a very long period of time tocks are the best-performing asset class of all time and probably won’t change soon. But whether stocks go up or down in the short-to-medium term will depend on events we can’t foresee and most of the times in ways that we can’t imagine. These events arrive as a surprise.
The smart investor realizes that the outlook is always cloudy, rainy days ahead and prepares very well to weather the storm when it arrives.
The most important consideration for long-term investors is their asset allocation. This refers to how you divide your portfolio up among various, imperfectly correlated assets, like stocks, bonds, real estate, precious metals, commodities and crypto, among many other asset classes.
Studies prove that 90% of investors’ long-term returns are depending to their asset allocation. The remainder is due to selection, costs and taxes.
The key question for long-term investors is: “Do I have a sensible asset allocation?”
There are plenty of economic expansions and recessions ahead of us. Plenty of bull markets and bear markets, too. But glance at a chart of the stock market for the past 200 years, nothing outperforms a diversified portfolio of good quality stocks in any period longer than 10 years. Every dip, correction and even bear market was a buying opportunity in the past.
That means long-term investors should make their investment approach very simple:
1. asset allocate properly
2. minimize your investment costs
3. tax-manage your portfolio.
4. rebalance your portfolio at least once a year
If you follow these guidelines, you are already ahead of 95% of all other investors. One of the primary goals of smart risk management is to take out the guesswork. Accept that uncertainty will always be around and ahead of you.
Sven Franssen