I think all long-term investors should keep a historical perspective on the markets. They should especially go back and review those periods in history where turmoil takes hold and the markets veer irrationally out of control. Looking back over the past year, reinforced some lessons that bear repeating:
- People aren't as risk tolerant as they think. Design your portfolio so you can emotionally withstand the inevitable down periods without panicing.
- Performance chasing, just like envy, is an emotion that is alive and well in the investment community. It is the hype that Wall Street is built on.
- Common sense goes down the drain when it comes to investing. Who wouldn't jump at paying $1 dollar for a hamburger that previously cost $2? But how many run away from buying the S&P 500 at 670 when they were buying with both fists at 1200. Or has Warren Buffett recently said, and I paraphrase, "When it's raining money, bring a bucket instead of a thimble."
- Seers and forecasters have no special insight and are wrong most of the time. Yet people will pay a lot of money for expert advice (magazines, newsletters, investment accounts). Like a stopped clock, they will be right every now and then, and they will be anointed gurus. Hope lives eternal.
- What we learned previously is easily forgotten when the greed cycle kicks back in.