Markets crash. On average, the market falls 10% once a year, about 20% every four or five years, about 30% every decade, and 50% a few times during your lifetime.
I used to think weathering market downturns should be easy. The market always recovers and reaches new highs. As Charlie Munger puts it:
“You can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder, and you deserve the mediocre result you’re going to get compared to the people who do have the temperament to be more philosophical about these market fluctuations.”
The longer you invest the more you realize most people don’t have the nerves of steel and raw logic that a Charlie Munger or Warren Buffett have.
That’s fine, because these investors can have a higher percentage in bonds or cash. To protect them on the downside. But what if you can’t stand losing a nickel? Well, you probably shouldn’t be investing in the first place.
Does that sound preachy? I hope it doesn’t sound preachy, I just know it’s easy to be influenced by talk of the next crash or recession.
Look, people have been predicting a crash since March 2009. In reality there’s a near 10-year expansion. I’m not saying there won’t be a crash. We all know there will. What I’m saying is investors don’t like not knowing.
Okay, but who’s going to hand you the schedule to get out of the market and back in? Even studies show economists failed to predict 148 out of 153 recessions.
It’s the investor who stays invested, regularly investing through good and bad, who ends up with the incredible long-term returns.
And this is why I want to share these rules. I’m hopeful they can provide some counterbalance the next time you feel “noise” is making decisions for you.
1. Long-term investing doesn’t mean weeks and months, it means years and decades.
2. Buy-and-hold investing works, but it only works if you buy and hold through ups and downs.
3. Frequent trading is the fastest way to achieve poor returns.
4. Being intelligent doesn’t result in better investment results, but being disciplined does.
5. How you behave is much more important than how your investments behave.
6. Investing isn’t about mastering the market, but mastering yourself.
7. Having a financial plan, and then sticking to it, outperforms having a plan.
8. If you’re fearful when the market goes down it’s likely you have too much invested.
9. Money you know you need in the next three to five years doesn’t belong in stocks.
10. Jumping from one trendy investment idea to another is how to get poor results.
11. More effort is counterproductive to good investment returns.
12. Don’t buy because the market is going up, and don’t sell because it’s going down.
13. Buying when everyone else is panicking is easy to say and challenging to do.
14. In hindsight, crashes and recessions always look like amazing opportunities.
15. When the market is going up investing is easy.
16. Buying and holding makes you money, buying and selling makes other people money.
17. Compound interest can make you rich, but it takes an incredibly long time.
18. Successful investing has little to do with IQ and a lot to do with personality.
19. If you invest in index funds you can’t beat the market.
20. If you invest in active funds there’s a high probability you’ll underperform the market.
21. Picking stocks and beating the market is possible but gets more difficult over time.
22. Trading is exciting, but asset allocation has more to do with your returns.
23. Higher returns means more volatility, more stability means accepting lower returns.
24. Simple portfolios beat complex.
25. There’s no such thing as the best investment.
26. “It will fluctuate” is the right answer about market predictions.
27. And remember, you’re not Charlie Munger or Warren Buffett.