From Uber rides to cocktail parties, often, when I share with someone what I do for a living, they want to know what stock they should buy. Or perhaps they ask about crypto or commodities – whatever is soaring and making headlines at the moment. The allure of making money overnight, whether it’s through new technology or an underappreciated growth story, is incredibly hard to resist. As such, my answer of “a well-diversified portfolio” is rarely appreciated.
Underappreciated though the maxim may be, Aesop had it right: slow and steady wins the race. A thoughtful portfolio that includes stocks and bonds, large and small companies, US and non-US firms provides a much more reliable path to growth than any exciting story. In news cycles driven by likes and retweets, this boring approach to riches struggles to be truly appreciated. But that doesn’t make it any less effective. For an empirically grounded, high likelihood of success route to wealth, let me be the Tortoise and not the Hare.
Keep Your Ego in Check
Aesop’s Hare was fast, proud, and confident. He eagerly boasted about his talents. If he had had a Twitter account, he would be the one with many followers, not the Tortoise. But the Hare’s talents made him overconfident. He was so sure that he would beat the Tortoise he came in and out of the race. Meanwhile, the Tortoise, continuing in a straight line at a consistent, if slow, pace, came out ahead. No viral videos to show him racing across the finish line.
Like the Hare, many investors grow overconfident, thinking they sell their stocks and bonds to avoid losses and buy back in just before the market is about to rise again. As markets go haywire and headlines turn dour, it can be tempting to decide to “sit this one out” and sell your investments for a time. Or perhaps to wait until the storms have passed,and then reinvest in the market.
The sad truth is that most investors earn much less than they could. Data from the 2022 Quantitative Analysis of Investor Behavior (QAIB) shows that the average equity fund investor earned only two-thirds of the return that the broad market offered. While fees contributed to somewhat lower investor returns relative to the S&P 500, the majority of those lost returns were because investors bought and sold at the wrong times. Investors have a tendency to act like the Hare.
The Dalbar Study: 30 Years of Average Equity Fund Investor vs. S&P 500
Average Annualized Return, 12/31/1945 to 12/31/2021
Past performance is not a guarantee of future results. Investing in stock involves risks, including the loss of principal. Indexes are unmanaged, and performance of the indexes includes reinvestment of dividends and interest income, unless otherwise noted. It is not possible to invest directly in an index. Source: DALBAR, Inc. with data from 2022 QAIB Full Study, as of 12/31/2021. DALBAR's Quantitative Analysis of Investor Behavior (QAIB) has measured the effects of investor decisions to buy, sell and switch into and out of funds over short and long-term timeframes. These effects are measured from the perspective of the investor and do not represent the performance of the investments themselves.
Don’t Sleep on the Job
In Aesop’s fable, the Hare could’ve beaten the Tortoise; just like in theory, investors could profit from selling at the top of the market and then buying back in again at the bottom. Aesop’s Hare lost because he was snoring away as the Tortoise ambled past him to win the race. In investing, even a short nap can be disastrous for your portfolio.
Here's a simple illustration of what’s at stake. Going back to 1990, a $10,000 investment in the S&P 500 would have grown to over $100,000 – an impressive ten-fold increase. Hit the snooze button, though, and not be invested during just ten of the best days in the market, and that nest egg would be just $47,000, less than half the potential.
Hypothetical Retuns of a $10,000 Investment in the S&P 500 Index
Janurary 1, 1990 - December 31, 2022
Past performance is not a guarantee of future results. Investing in stock involves risks, including the loss of principal. The hypothetical example assumes an investment that tracks the price returns of a S&P 500® Index but does not reflect dividend reinvestment and the impact of taxes, which would change these figures. The “Best Days” were determined by ranking the one-day price returns for the S&P 500 Index within the stated time period. There is volatility in the market and a sale at any point in time could result in a gain or loss. Indexes are unmanaged, and performance of the indexes includes reinvestment of dividends and interest income, unless otherwise noted. It is not possible to invest directly in an index. Source: Factset, as of 12/31/2022.
Take Your Time
What else does the tortoise portfolio need to be successful? Time.
The longer an investor holds a portfolio, the greater the chance of a positive outcome. Looking back to 1950, a portfolio evenly split between stocks and bonds returned anywhere from up 33% to down 15% after a single year. But extend that time horizon to 20 years, and even the worst return was up 5% on an annual basis. In fact, on average, a stock and bond portfolio grew during that time period by five fold. Now that statistic deserves a retweet.
Portfolio (50% Stocks, 50% Bonds), Range of Total Returns
Annualized Total Returns, 1950 – 2022
Past performance is not a guarantee of future results. Investing in stock involves risks, including the loss of principal. The hypothetical example assumes an investment that tracks the price returns of a S&P 500® Index and Bloomberg Barclays U.S. Aggregate but does not reflect dividend reinvestment and the impact of taxes, which would change these figures. Indexes are unmanaged, and performance of the indexes includes reinvestment of dividends and interest income, unless otherwise noted. It is not possible to invest directly in an index. Source: J.P. Morgan Asset Management, Kestra Investment Management with data from Factset, as of 3/31/2023.
Be the Tortoise, Not the Hare
When the Tortoise won his race, there likely weren’t any cheering crowds, reporters, or medals. Just the simple satisfaction that a consistent approach and time won the day. A lesson in how small, consistent actions over an extended period of time can overcome even the most difficult challenges. May our portfolios be similarly fortunate.
Invest like the Tortoise and live richly,
Kara
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. Does not offer tax or legal advice.