I’ve included a few excerpts from the letter below. In the current environment with risk-free interest rates near zero and the stock market performing like it’s a riskless bet, the pressure to make emotionally charged investment decisions is immense. You start thinking you don’t want to miss out on stock-market gains. Your brother-in-law, and yes, even your nephew the bartender, are boasting about their speculative forays into the market. You start comparing your returns to their returns, or worse yet, to some arbitrary benchmark. Without even realizing it, you transform your portfolio into a seething pile of speculative junk stocks. When the speculative fervor ends, as it inevitably will, you are left with a portfolio that is a shadow of its former self.
How do you resist the pressure to run your portfolio off the rails? The key to personal investment success, as Zeikel reminds us, is to remember that investing is an individualized effort. Comparing the performance of your portfolio to anybody else’s returns or to those of some arbitrary benchmark is not at all useful or relevant. Personal investment success is achieved only when your financial goals and objectives are met without exceeding your risk tolerance.
Here’s some of what Zeikel has to say:
“Personal portfolio management is not a competitive sport. It is, instead, an important individualized effort to achieve some predetermined financial goal balancing one’s risk-tolerance level with the desire to enhance capital wealth. Good investment management practices are complex and time consuming, requiring discipline, patience, and consistency of application. Too many investors fail to follow some simple, time-tested tenets that improve the odds of achieving success and, at the same time, reduce the anxiety naturally associated with an uncertain undertaking. I hope the following advice will help:…”
“There is no free lunch. Risk and return are interrelated. Set reasonable objectives using history as a guide. All returns relate to inflation. Better to be safe than sorry. Never up, never in. Most investors underestimate the stress of a high-risk portfolio on the way down….”
“Never overreach for yield. Remember, leverage works both ways. More money has been lost searching for yield than at the point of a gun (Ray DeVoe)….”
“Watch out for fads. Hula hoops and bowling alleys (among others) didn’t last. There are no permanent shortages (or oversupplies). Every trend creates its own countervailing force. Expect the unexpected….”
“Take the long view. Don’t panic under short-term transitory developments. Stick to your plan. Prevent emotion from overtaking reason. Market timing generally doesn’t work. Recognize the rhythm of events.”
If you are interested, you can read Zeikel’s entire article here.
Jeremy Jones, CFA
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