Paranoia versus “Set it and forget it”

Geoff Davey of Finametrica (we’re fond of Finametrica’s risk assessment tools) has produced an interesting analysis that may help us tolerate the emotional roller coaster called investing.  Davey looked at market movements over the last 40 years and monitored the gyrations of two different portfolios–a 70% stocks portfolio and a 30% stocks portfolio.  There were some interesting similarities as well as a few differences.  In either case, there are implications for controlling one’s emotions as they apply to investing. 

Davey observed that if one looked at the monthly historical performance of the 70% stocks portfolio, it would show the portfolio value to be falling 33% of the time, recovering from a recent low 41% of the time and rising from a recent high 26% of the time.  Surprisingly, the 30% stocks portfolio didn’t vary greatly from the 70% stocks portfolio, as it showed roughly a 1/3-1/3-1/3 behavior as well.    The primary difference between the two allocations was found in the magnitude of the fluctuations, not in the direction.

However, extending the evaluation period from monthly to yearly paints a much different picture.  When examining historical results on a yearly basis, Davey found that the 70% stocks portfolio was rising 63% of the time, recovering 19% of the time and falling only 18% of the time.  The time period difference was even more dramatic for the 30% stocks portfolio as it was rising 84% of the time, recovering 8% of the time and falling only 8% of the time.

The moral of this story?   As investors, we become our own worst enemies if we react to the day by day fluctuations of the market.  That supposition most likely plays out in spades if one reacts to the second by second  market movements espoused by day traders.  For all but a few, “slow and steady” is definitely the better way to build wealth when participating in the financial markets.