In Your Investments, ‘Be a Good Loser’

A good oldie post from Meb Faber:

There are two states an investor lives in with their portfolio: record highs and drawdowns. If Apple’s stock trades at $170 per share tomorrow, it would be a new all-time high. However, if it fell to $160 per share, it would be in a 5% drawdown from its past record at $168.

The emotional risk for investors is it’s easy to anchor the value of one’s investments at the highest level they’ve seen in their portfolio to date. Then, when a drawdown inevitably occurs, one is liable to be disappointed at the reduced value they see today instead of being content with the large gains they have likely accrued compared to years earlier.

Faber points out we need to be comfortable with this ‘drawdown’ state because after adjusting for inflation, that’s how we spend most of our days as investors. Here is the percentage of days from 1972-2014 that investors were looking at new highs in their portfolios, broken up by asset class:

US Stocks  17%

Foreign Stocks 12%

Bonds 16%

REITs 16%

Commodities 9%

Gold 4%

60/40  22%

Best-case scenario: only 78% of trading days will you know your assets were worth more at some point in the past. One simple solution to reduce the frequency of this disappointment is don’t check your portfolio as often. If you are only looking every 6 to 12 months, the odds of seeing a higher value today than you remember seeing the last time you checked are much greater.