Updated: Aug 19, 2024
Confidence comes mainly from experience and education. To become a confident investor, one needs to understand the realities of investing in the stock market. One needs to understand that the stock market is very irrational in the short term. All markets overreact to both positive and negative news. As long as human beings are involved in the markets, there will be periods of excessive swings in both higher and lower directions. A confident investor understands this and expects this.
You can be a victim of this irrational behavior, or you can use it to your advantage. Our Beyond Buy & Hold system is one way of using excessive market volatility to your advantage.
Becoming a confident and secure investor is a process.
A confident investor:
Is disciplined and unemotional in their investing – they avoid the pull of greed and fear.
Has the right expectations – they don’t expect 20% or 30% annual investment returns and they also don’t settle for measly gains of 5% or 6% per year.
Is not a gambler – they avoid the “no risk – no reward” mantra. They know that big risks can mean big losses and the proper long-term investing strategy results in huge gains.
Has the proper time horizon and is patient – they don’t put any money they might need to spend in the next five years in the stock market. They are only investing for the long-term.
Understands WHY the stock market will always go up in the long term – it is not enough to have the knowledge of the stock market’s long-range performance. To have the right investing conviction, people need to know the reasons behind the performance.
Confident investors have the knowledge that the broader market of large cap stocks will increase by 9% to 10% per year in the long term. Anything is possible in the short-term. Markets could drop by 40% from their current levels and they could increase by 40% from their current levels in the next 12 months. None of that really matters to a confident and secure investor. Confident investors know that they will not be taking their money out in the next several years, so they are only focused on long term results.
How can we be so confident that the stock market will continue to appreciate at a over 9% annual rate out into the future? The answer is because we are so confident that the biggest and best companies in the world will continue to increase their cash flow by 9% per year. The companies in the S&P 500 have produced annual profit increases of 8.7% per year for the last 100 years. Remember that a 9% increase in annual profits is not a stretch for most companies in the long run. At the companies I ran, we never had an annual profit goal of less than 10% above the previous year. Investors demand that from their management teams.
Our entire economy and our entire society are dedicated to ensuring that these companies grow and flourish. Our government depends on the tax revenue they produce. Society depends on the jobs they produce. Investors depend on the profits they produce.
But what if our system collapses? Given our political and societal challenges, this seems like a fair question. It could happen but I would expect any system that follows this one will be dependent upon those companies succeeding. But more importantly, if you are worried about a system-wide collapse, you absolutely need to be following along with our system and approach. We can’t avoid small, short-term losses with our system, but we would get your money out of the stock market long before the major damage would be done to your investments in the event of a systemic collapse.
In summary, to become a confident investor you need to focus on patience, discipline, and knowledge – not because we say so but because we plan to help you learn about the benefits of this approach. This current period of market turbulence is a test for what kind of investor you are. We want to help you pass this test and all future tests.
A confident investor:
Has a sound investing strategy that puts them in the best long-term investments,
Has a strategy that avoids catastrophic losses in major bear markets,
Doesn’t flinch when markets are down,
Doesn’t get too excited when markets rise significantly,
Doesn’t pay attention to the sensational market news of the day,
Doesn’t get swayed by the “fear of missing out” on the next big investment vehicle,
Focuses only on the long term.
If you are not already a member of our Market Signals membership, click here to learn more.
Happy Investing,
Phil
Disclaimers *The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
SUMMARY:
The 2023 rally in the stock market stalled out last week.
But we are still sitting well above the lows reached in October of 2022 and are still close to the all-time highs in the S&P 500.
Small cap stocks have not rebounded as much and are still well below their all-time highs.
The major stories are still the same – interest rates, inflation, and recession concerns.
Recent trends in interest rates are not positive for the stock market.
The trend in interest rates and the fact that stocks are approaching a key resistance level (all-time highs) we can expect a lot more volatility in the markets in the short term.
At nineteen months into this bear market of 2022/2023, it is a good time to step back and get some perspective. 2023 has been a good year for both the S&P 500 and the Nasdaq. As of the market close on Friday August 4th, the S&P 500 is only down about 6% from its previous peak at the start of the 2022. The Nasdaq is down about 12% from its all-time high and the Russell 2000 is still down around 20%. In the graph below, you can see the nice bounce off of the October 2022 lows and the slight reversal last week.
The stock market decline last week (7/31 to 8/4) was all about interest rate fears. The rating agency, Fitch, downgraded the credit rating of the United States. This is very unusual and hasn’t happened in a long time. They raised concerns about political disfunction and the inability of the government to deal with government debt among other things. Downgrades like this result in higher interest rates on government bonds.
This bear market has been driven by inflationary pressures and its resultant impact on interest rates. While the Fed seems to be nearing the end of its rate raising cycle, the debt downgrade has introduced another factor into the interest rate outlook.
A nice way to track bonds and interest rate trends is by looking at bond prices. Remember that bond prices move in the opposite direction of interest rates. When interest rates rise, bond prices go down and vice versa. And the cleanest way to track bond prices is by looking at zero coupon bonds. Since zero coupon bonds don’t pay any interest, the total return on these bonds is reflected in the price of those bonds. We use the symbol ZROZ to track bond prices.
In this first chart of the price for ZROZ, you can see the deep and steady decline of bond prices since the start of the stock market decline at the beginning of 2022. While the price for ZROZ seemed to bottom in October of 2022 like the stock market, its rebound has stalled out. ZROZ is still down about 50% from the end of 2021.
Let’s take a closer look at the price of ZROZ since the end of 2022. From the bottom in October of 2022, ZROZ climbed quickly from $80 to almost $100 in December of 2022. And since the beginning of April 2023, ZROZ has declined steadily back to the lows of October of 2022. Again, this is due to the upward pressure on interest rates (the Fed, inflation, debt downgrade).
The stock market rebound continues to be dependent upon the trend in interest rates. If rates continue to climb, stock prices will suffer. The bond market is currently experiencing the largest short position ever. This means that hedge funds and other traders believe that interest rates will continue to rise and bond prices will continue to drop. This also signals more price volatility in both stocks and bonds.
The reality is that no one knows if the worst is over or not. The last time there was such a high short position in bonds, bond prices and stock prices increased. Because of the uncertainty, it is important to follow a disciplined approach to investing. Followers of our Market Signals newsletter are positioned to benefit if the market keeps moving higher and will be able to limit losses if the market turns down from here. It is critical to have an investing strategy that wins no matter which way the market moves. No one can predict which way things will move in the short term. But we all know that in the long term, the direction of the stock market will be higher. Stay disciplined, my friends.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
The average 401K investor only earns about 5% per year on their investments. This investment performance is very poor and very damaging financially.
Simply putting 100% of their money in a Target Date Fund would earn investors 7.5% per year. Putting all their money in an S&P 500 Index Fund would deliver over 9% per year.
Both strategies (Target Date Fund and S&P Fund) leave investors exposed to the pain of bear market collapses, but they will produce a more secure and comfortable retirement. Compared to the measly 5% that the average investor earns, these same investors can retire with $500,000 to $1,000,000 more if they follow the simple strategies mentioned above. In fact, the amount is even greater because every investor should be making more than 10% per year on their investments in the long term.
There is no good or logical reason for people to be missing out on these large sums of money. Most workers are very concerned about having enough money to retire comfortably. Yet, they still stay wedded to their poor investing strategies.
So why does this continue to happen?
There are several reasons for this:
A lack of good and consistent investment advice.
Confusing and misleading investing information.
The fear of losing money in stock market collapses.
A lack of effective strategies to deal with stock market volatility.
Impatience – a lack of understanding of financial markets causes investors to make impulsive decisions to change strategies frequently.
To add insult to injury, most investors are not even aware of how badly their investments are performing. This is because they don’t even know how they are doing. They either don’t pay attention, or they don’t know how to evaluate their performance.
This is very unfortunate and represents a big problem for our society. We need to fix this so that people can enjoy the retirement that they deserve.
We are on mission to fix this.
Most of you have read my book so you know that fixing this problem is not that complicated. The financial services industry intentionally makes it complicated. They want people to be confused so that people need them. But they do not have the solutions people need.
Better investing requires two things:
1. Picking the right investments.
2. Having a proven and effective strategy for dealing with stock market collapses.
Most have you have figured all of this out already since you are following our BB&H system and reaping the tremendous benefits – higher returns and protection against bear market collapses. But don’t fall prey to the noise around you.
Stay disciplined and patient and avoid making bad decisions based on fear, greed, and impatience.
Happy Investing,
Phil
Disclaimers *The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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