What are your shock absorbers?
Sep 15, 2019
Successful investing and wealth creation is about achieving results through cycles, not just over one cycle or a few years.
The best strategies are those that work consistently, and all the time – for decades and centuries – not just some of the time, or for discrete periods.
Just as a successful and thriving economy needs shock absorbers, so too do individuals.
The traditional shock absorbers include a diversified portfolio across different asset classes and countries, and a healthy buffer.
Cash isn’t a popular asset class right now, but cash is uncorrelated to the stock market, it gives you a buffer as protection, and gives you great optionality for when far better investment opportunities come along (which, by the way, they will).
It’s been a remarkable run for US stocks for the past decade – the S&P 500 index running from a 2009 low at 676 to well above 3,000 – but buying at these levels means expected returns now must be low.
By the way, guess what? There are more places to invest other than Australia and the US!
Historically, periods of stock market over-performance have always been followed by under-performance, a pattern that’s reflected and repeated all around the world (in both developed and emerging markets):
So while the ‘average’ real market returns are very often and for long periods of time, well, pretty average – in the good years markets do exceptionally well, and in the bad years…oh dear.
Hence the importance of buying low, even if it means demonstrating that rare commodity: patience!
I discussed shock absorbers in the economy a little more in the video here
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