I Wish I Invested in 2009:

One of my clients, we’ll call him Steve for this newsletter, frequently mentions that he wishes he had started investing in 2009. We’ve been working together for over five years and he still regrets not taking advantage of the markets when the right opportunity presented itself (and he was in a financial position to do so).

My response also remains the same when Steve brings this up:

“It doesn’t matter what you did or didn’t do in the past. What matters is what we do going forward.”

To give some background, Steve is a self-taught investor who became rather educated about finance and closely watches the market. In fact, at times of market turbulence, I’m almost certain Steve will reach out to explore opportunities to take advantage of it.

So, have you ever thought that perhaps you should have started investing sooner or more proactively? My guess is that even the more sophisticated and successful non-professional investors have asked themselves this question or at least wondered about it during their investment journey.

So what prevents people from investing and specifically from trying to take advantage of market turbulence? In this newsletter, I wanted to explore some of my professional observations, but there are certainly other reasons.

1.) Misunderstanding of what investing actually means

For many who are new to investing, it may very well feel like gambling such as going to a casino or horse racing. Many financial media outlets tend to strengthen this erroneous belief by presenting investing as a high-octane activity that requires quick decisions. Investing should be boring. If you're looking for excitement, there are so many better ways to spend your time and money.

Please also understand that successful investing has much more to do with risk management than picking winners or trying to time the markets. In fact, some of the best long-term investors, such as Seth Klarman, Peter Lynch, Howard Marks, and even Warren Buffett in his early days, are best known for their ability to manage risks, not for picking stocks or bonds. Once you understand how much investing has to do with risk management, it will be much easier for you to sell when markets go up and buy when they go down (i.e., buy low and sell high).

2.) Lack of financial education

I’ve always been passionate about financial education. This weekly newsletter, along with at least a dozen seminars we do each year, is proof of it. There is significant empirical evidence that people who understand the basics of finance and investing are more successful in the long run.

As a professional observation, these people also make better clients, as they are able to make educated choices about their financial advisor. Even though financial information is easy and free to access, many people still struggle with a lack of financial education.

I recently reviewed a study by Annamaria Lusardi, Senior Fellow at Stanford University, and Olivia Mitchell, Professor at the Wharton School of the University of Pennsylvania, who are the originators of the “Big Three” fundamental questions about financial literacy.

According to this study, only 29% (!) of Americans correctly answered all three questions about how compound interest, inflation, and diversification work. (See the bottom of this newsletter if you want to know what the actual three questions are.)

3.) Hesitation to invest

In many respects, hesitation to invest, or investing overly conservatively, is related to lack of financial education. There is nothing wrong with being conservative when it comes to your investment decisions. For those of you who have known me a long time, you know that I always lean on the side of being conservative, as you simply don’t know what you don’t know. However, if you are overly hesitant or even fearful and not able to take calculated risks, it will be challenging for you to make optimal investment decisions, especially in times of market turbulence.

4.) Lack of planning

We are now getting to perhaps one of the most important parts of successful investing. You need to have a plan! It can fit on a single sheet of paper or be more complex, depending on your circumstances. It needs to cover what you would do in good times and bad times. If you don’t have a plan, your outcomes are not likely to be optimal. Or, even worse, you may end up selling stocks and losing your hard-earned dollars in times of market turbulence.

5.) Lack of understanding of the behavioral side of investing

Behavioral finance has been growing in popularity since the late 1970s. This area of finance is of particular interest to me, as it attempts to describe the differences in how presumably rational investors react to unexpected events. If you ever decide to take advantage of market turbulence, you really need to understand concepts such as recency bias, herding behavior, the disposition effect, among others. These behavioral traps may impact your investment decisions even when you are not aware of them. If you believe that people’s behavior has changed much over the past several decades, or even centuries, you might be mistaken.

If you’re looking for a casual weekend read, check out a short book called “Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay, published in 1841. A lot of what was discussed then is uncannily similar to where we are today.

What does this mean to you?

My message is simple. Don’t stay on the sidelines.

If you want to invest, create a plan and begin investing.

Keep in mind that times of market turbulence are often some of the best opportunities to get started, as my client Steve reminds me every time he says he wishes he had invested back in 2009.

*** These are the three Big Questions that only 29% of Americans can answer all three correctly:

Compound Interest:
Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

Correct answer: More than $102.

Inflation:
Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

Correct answer: Less than today.

Risk Diversification:
Buying a single company’s stock usually provides a safer return than a stock mutual fund. True or false?

Correct answer: False.