October 27, 2021 – Halloween is upon us, so be prepared to have fun, but in a spooky kind of way! Celebrating Halloween is a ritual, one we have become prepared for over many, many years. While we create fun and excitement in our own ways, some basic traditions serve as constants that make the benefits memorable.
Wouldn’t it be awesome to speak with clients about the principles of investing their money using concepts similar to those learned through our Halloween rituals? Would investing be easier to understand? Could it generate fun and excitement? Does it have to be spooky? Allow me to take some liberties with my theory that the rituals are more similar than first meets the “evil eye.”
“Trick or Treat” has become the essence of the holiday. Children hit the town, searching for treats – usually candy, small toys, or the “pot of gold,” money from grandparents. If you put in the effort and stick with the process, it usually proves to be lucrative. However, it’s not always smooth sailing. Sometimes no one is home, or the treat basket is empty. Then there is the progressive town administrator that decides a curfew is in someone’s best interest. And worst of all cases, the dreaded “climate crisis.” Rain, wind, and possibly snow guarantee less of a bounty and, possibly, a catastrophic event.
The essence of smart investing is understanding that a risk-reward tradeoff exists. The lure of financial “treats,” i.e., returns on your portfolio, must come with the realization that “tricks,” in the form of financial losses, are inevitable. Ending with treats that will last for a while will require you to have a plan and expect to receive some “tricks” along the way.
Shopping for candy is another essential part of the Halloween process. The dilemma we face is what type of candy we should purchase. There is Milky Way, Snickers, Reese’s, Baby Ruth, Almond Joy, Mounds, and dozens of other possibilities. Parents wonder what the children like and manufacturers must decide what to sell. This problem is why you now can buy big bags of mixed candy. Providing variety is an appealing distribution strategy, until the year you are left with more Twizzlers than you could ever consume! In the future, you may convert to pre-packaged goody bags to ensure even distribution.
When investing, the variety of assets available for purchase is analogous to the almost limitless choice in candy. And what do these similarities highlight: the principle of diversification! The investment world speaks to various asset classes such as equities, bonds, real estate, and alternatives. It seeks these asset types from different parts of the world and further divides them relating to size and risk profile. No more complicated than US Tootsie Rolls, Swiss chocolate, Netherland’s licorice, Cadbury from the UK, French nougat, Italian cookies, and many other varieties worldwide. Why stick to the S&P 500 when there is a wide array of treats waiting for us all, able to tempt our palates.
Of course, much deliberation occurs over the perfect costume. The first hurdle is “who do I want to be?,” which will be the subject of intense research, including communication with friends. Two Elsa’s trick or treating together could be life-altering! The next big decision you face is “buy or build.” Should you surf the net or visit a store to purchase one of the many pre-packaged costumes on display? They are beautifully designed and come with all the accessories to complement the look. Easy Peasy! Or do you want to tap your creative side and build that perfect homemade costume? You gather random pieces of clothing, a makeup kit, and various household trinkets that represent your individual spirit when put together. You really cannot go wrong either way.
Likewise, in the world of investing, utilizing index mutual funds or exchange-traded funds is known as passive management. You set your sights on a specific investment approach and select from several pre-packaged solutions to provide the “look” you seek. On the other hand, you might consider active management of your portfolio, by either yourself or a separate manager. It is your attempt at being creative, picking those investments you believe will out-perform the index. Again, either approach works depending on the outcomes you expect.
Another adage followed by investment professionals says, “Time in the market always beats market timing.” Before you try to time the market, you should understand that there’s more at stake than just missing the bottom of a crash or the top of a bull run. Over the years, trying to time the market can cost you a lot of money. If you were fully invested in the S&P 500 for 20 years, 2000-2020, your return would have been 6.06%. Missing the best 10 days, over that 20-year span, would have reduced your return to 2.44%. Missing the 60 best trading days, out of the 7,300 in this period, would have resulted in a loss of 7.02%. Have a plan and stick to it.
After trick or treating, I always looked forward to sorting through my bounty and beginning to “horse trade” with my friends. I never liked malt balls or thin mints, but I loved Almond Joys and Kit-Kats. It seemed like a no-brainer to exchange my “losers” for more desirable candy. In the world of investing, this is known as tax-loss harvesting. You sell portfolio assets to realize deductible losses on your tax return and buy similar securities with gain potential.
Clearly, I am having some fun with the extended Halloween metaphor, but I do hope that you take some time to reflect on the essence of this essay. Whether charting the best path around the neighborhood on Halloween night or crafting an investment plan that will be central to your financial life, it is vital that you are thorough and intentional. Consider all the risks and rewards, be honest and reasonable about the outcomes you expect, put in the time and effort necessary to craft a solid plan, and then stick with your plan. Regardless of which path you choose, know that our team will be here, ready to provide professional guidance and support. The front porch light is on; all you need to do is knock.