I love the great outdoors. Hiking, fishing, camping are the hobbies I enjoy most. My wife and I spent a few days hiking in the Rocky Mountain National Park this summer, and it was beautiful. Our best vacations tend to be outside enjoying nature. We have visited several national parks over the years, including Yellowstone, Yosemite, and Grand Teton.
Camping in the mountains, on a beach, or near a river is peaceful and serene. The views. The sounds of nature. The clean, crisp air. A robust fire. Sleeping under the stars in a tent is lovely until you hear the buzzing sound of a mosquito, a single mosquito. It’s hard to imagine how much sound a small insect can produce, but it’s enough to keep you awake and annoyed for hours. Trying to locate and kill the mosquito is even more challenging than struggling to fall asleep. Though a mosquito is tiny, it can quickly ruin the joy of spending time outside.
A mosquito is like a bad investment in a diversified portfolio; it’s hard to ignore. If an investor owns ten mutual funds – nine up, one down, they’ll focus on the loser. It’s human nature. An investment down in value can distract you from the positive returns from the rest of your holdings. Several years ago, I was reviewing my parent’s account. It was a good year for returns, and most of their stocks were up except Qualcomm. My mom wanted to know what was wrong with it, why was it down? There was nothing structurally wrong with Qualcomm; it was just out of favor – a temporary pause in a long-term uptrend. It has since recovered.
The mosquito in the tent this year is small-cap value. Small-cap value stocks are down 11.5%, and investors are losing patience. These stocks are distorting the view of better-performing asset classes like large-cap growth stocks, up 31%.
During my quarterly reviews with clients, all eyes turn to their small-cap holdings. Why do we own these stocks again? Is there anything better? Can we sell these losers? I don’t like losses either, but there will always be an investment out of favor in a diversified portfolio. If all your assets went up or down at the same time, you’re not diversified. Over time, your investment holdings will fluctuate between leading or lagging. Sectors trade in and out of favor often.
It’s hard to imagine today, but small-cap value stocks have outperformed large-cap growth stocks for the past twenty years. A $10,000 investment in the small-cap value index is worth $58,380, whereas the same investment in the large-cap growth index grew to $39,050, a difference of $19,330.
During the early 2000s, investors wanted to ditch large-cap growth stocks. From January 2000 to January 2010, they lost 24%. A $10,000 investment fell to $7,635 during the decade – a huge loser. If you sold them in 2010, you missed a 411% return for the past ten years.
It takes patience to be a successful long-term investor. Peter Lynch, the legendary investor of the Fidelity Magellan Mutual Fund, would typically own a stock for three to five years or more before it showed significant gains.
Here are a few suggestions to help you better manage your investments.
- Buy and hold a diversified portfolio of stocks, bonds, and cash because you never know when, where, or why investments will decide to take off.
- Invest early and often.
- Be a net buyer of stocks. Ignore the market.
- Rebalance your accounts annually.
- Be patient; today’s losers can be tomorrow’s winners.
- Think long-term to create generational wealth.
- Develop a plan, set goals.
- Follow your plan.
“In the stock market, the most important organ is the stomach. It’s not the brain.” ~ Peter Lynch
October 16, 2020
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.