Rules of Thumb
It’s mind boggling to think about the amount of information humans are exposed to throughout a day’s time. There are billions of pieces of information we’re exposed to every second and we make thousands of decisions each day. Rightfully so, our brains can’t keep pace and absorb all of the wisdom we want. And while there are those of us better at soaking up information than others, eventually we all rely on Rules of Thumb…because we have to.
In our financial lives, people have an inclination to use personal experience and intuition to make thousands of important decisions over a lifetime. We do this because we think it’s the right thing to do, or because it’s easier. We get it, these decisions are difficult and clumsy — exhausting to even think about. But when the decisions we face get emotional and complicated, our chances of screwing things up skyrocket.
This is why we use Rules of Thumb. They’re simple and effective and make our lives easier. We think you should seriously consider them too…your investing success may depend on it.
Check out a few below that I would suggest for any investor. Some obvious, some not. In no particular order…
- Market timing is garbage. Investors have been trying to master this for centuries. It still hasn’t happened, nor do I think there’s any reasonable chance of it. It pays to own stocks, not get in and out of them.
- Stocks are natural climbers. Stocks have returned an average of 9% per year over the last 88 years. Returns are positive 72% of the time over rolling 1-year periods and 100% of the time over rolling 20-year periods. Even though there are periods of negative or flat returns, sooner or later stocks march higher.
- Good news takes time; bad news comes fast. We know that stocks go up over time, and they go up more often than down. But when the rats start jumping ship, they move fast. Hence one reason why market timing is garbage… there’s a good chance the move has already materialized and you should do the exact opposite of what your gut is telling you.
- Nobody knows where the economy is headed. As much as we want to believe that someone knows, really, no one does. Sure, there’s always going to be someone who gets it right because they’ve been saying for 10 years running that the economy is circling the drain. Or there’s always the one “guru” who predicts the timing right, and for the right reasons. But chances are it was more luck than skill and they won’t claim the title again.
- Avoid dumb, emotional mistakes. Sounds obvious, but this is one of the key reasons we use Rules of Thumb. Don’t let your reflexive brain sway financial decisions — relying on emotions, intuition, and experience. Mixing money and emotion is bad. Hire P&A.
- Compounding returns create wealth. This is the most important factor related to investing. It should be taught in grade school and NEVER forgotten. As Dan always says, the early dollars are the most important.
- Simpler > complicated. When it relates to investing, difficulty doesn’t earn anyone bonus points. And it doesn’t take a genius…develop a plan, stick to it, and avoid dumb, emotional mistakes (see above). The brilliant-minded often turn out to be bad investors…classic over-thinkers.
- Stop watching the news. Unconventional? Unreasonable? No. “Stocks Plunge in July” scrolls across the TV screen way more than “Stocks more than double in the last decade, despite weak economy and political turmoil.” Read a book instead, I’m confident you can learn more and earn more. The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money by Carl Richards is one for everybody.
*This article was written by me, Shane Riley, and may not represent the opinion of everyone at P&A.