Dave Sather's Money Matters: The average investor 5 years later
This week, the press has run every story imaginable recounting the financial implosion that began five years ago with the Lehman Brothers bankruptcy.
However, as one of our clients, Charlie, said "So what? Nothing has changed."
Over coffee, we discussed the fact that not a single senior executive from any Wall Street bank has faced criminal charges for their part in the debacle.
Furthermore, the government has proven inept at understanding or anticipating the risks weighing upon our financial system. In the aftermath, bills like Dodd-Frank have yet to be implemented and appear too unwieldy to be effective. There is a clear disconnect between what happens on Wall Street and those of us who live on Main Street.
Charlie, a local business owner, just shook his head as he was visibly disgusted with our elected leaders and those making massive campaign donations in exchange for favors. Despite the rebound in the financial markets, Charlie asked, "How is a person supposed to make good decisions knowing these things happen?"
It's a great question and one we have discussed with virtually every client we have.
First, don't worry about things beyond your control. Although it may be interesting water cooler talk to guess the next chairman of the Federal Reserve, we have zero control over it. Furthermore, the next Fed chairman will have little impact on how much product Coca-Cola, Wal-Mart or Johnson & Johnson will sell over the next 20 years.
Instead of worrying about things beyond your control, focus on "what is known" as opposed to things that "might be."
Understanding this, do not invest in things you do not understand and only invest in assets that are predictable and consistent. This gives a logical investor the best insights into what something should be worth in the future.
Secondly, the downturn in the financial markets was nothing new. We experience a good drop in the financial markets about once every 10 years and a really big drop every 30 years.
For this reason, we always tell our clients that if we are going to invest in stocks, be mentally prepared for a 40 percent drop in any one year or 60 percent over a two-year time frame.
Knowing this, we never invest client money in stocks unless we have a 10-year time frame or longer.
From September 2008 to March 2009, the stock market fell more than 40 percent. However, if you bought in September 2008 and held until today, you are up more than 35 percent. Time and a long perspective are your friends when investing in the stock market.
Thirdly, the use of debt does not make us right or wrong - but it magnifies the amount by which we are right or wrong. Too much leverage brought down some of the mightiest on Wall Street and it can do the same for individuals. However, if you are debt-free, or better yet highly liquid, you can afford to be very patient - and pick up some bargains along the way.
Finally, smart investing requires emotional stability and the ability to think rationally and critically. In today's "sound bite a second" world, we have largely lost the capacity to think through semicomplex topics. The next time you need to assess your portfolio - or make important decisions of any nature - turn off the sensationalistic media, sit quietly and think about what makes sense.
We will never cure the greed or foolishness of others. Sadly, those are enduring elements of human nature. There will continue to be frightening drops and crashes in financial markets and emotional reactions. However, logic, liquidity and a long-term focus put smart investors in a strong position for solid results.
Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.