December 28, 2021
It’s the time for steeling your resolve about ways to improve your life… and how to make yourself wealthier – or, depending on how things go, preventing yourself from becoming poorer – is a good place to start.
In that spirit… here are six resolutions that any investor would do well to consider in the new year…
1. Would You ‘Buy’ That Again Now?
There are an infinite number of things that we could buy… stocks, Caribbean islands, Patek Philippe watches, 75-inch 4K Smart TVs, Hermès ties… Money is useful in that way.
But – unless you’re the Federal Reserve – we don’t have an infinite amount of money. So whenever we buy one thing, we’re making an explicit decision to not buy lots of other stuff. And there is a cost associated with that decision – it’s called opportunity cost.
When you’re investing in stocks, the opportunity cost is easy to figure out. You can see how other stock prices changed after you made an investment decision, and (if you want to torture yourself) look at how much money you could have made… Hindsight is 20/20.
But the “cost” of what you didn’t buy is less clear with respect to other types of goods. The money you spend on that Cancún getaway is cash that you’re not putting away for your children’s education. It’s cash that you’re not using to buy shares in a stock that could double or triple in price in coming years (or… in a stock that could fall to zero).
When you understand what you’re not buying, you might change your mind about what you purchase. Or you might decide that what you’re buying is the best possible use of your funds.
But remember: Right now, you’re buying everything you own – again. Every day, your cash is tied up in something that you own today.
So ask yourself: “If I had the cash in my hand to buy this thing right now, instead of the thing itself” – whether it’s a French door refrigerator, a Belize beach bungalow, or a dozen shares of Amazon – “would I still buy it right now?” If the answer is no… well, you know what to do.
Every moment that you’re holding onto an asset, you’re using valuable capital that you could put to a different use… That means every day you’re “buying” something that you already own.
2. Get in Touch With Your Feelings… About Money
It may sound obvious, but in order to get more money, you need to like money. You can’t attract something that repels you. It’s the financial equivalent of “If you want friends, you have to be a nice person,” and “If you want to lose weight, eat healthier and exercise.” Obvious stuff, right?
But if deep inside you feel having a lot of money means you’re selfish or greedy, or if you think money is a little dirty or somehow naughty… I have bad news: You’re probably never going to be rich, or stay rich. If on some level you don’t like money, it’s unlikely that you’ll ever have a lot of it.
Ask yourself if any of the below resonates…
- Money is the “root of all evil.”
- Making money takes too much time and effort.
- If I want money too badly, other people will think I’m shallow.
- Money doesn’t buy you happiness, so why bother?
Your emotions – consciously or unconsciously, intentionally, or accidentally – are the invisible tripwires of life. And if you let them, they’ll also get in the way of your path to riches. If there’s a voice in your head telling you something like the above, even (or especially) if it’s just a quiet muttering in the background, it’s going to trip you up.
Rich people don’t have mixed feelings about money. They wouldn’t be rich if they did. If you do… either fix it – or remain non-rich.
A new system shows which stocks could soon rise 100% thanks to a Connecticut couple’s catastrophic 401(k) loss.
3. Expect Mean Reversion
A mean is a way of averaging. It’s what you get when you total a bunch of numbers and divide that by the number of items counted.
Means can change over time. The average temperature of the Earth has been rising. The average American kid has more allergies today than he did two generations ago. The computing power you can hold in your hand has risen exponentially over the past few decades. Some things do change over time – in a deep, structural way that alters how we live.
But for almost everything else, random events and developments can take things one way – and eventually they usually return to normal, or the average, and the cycle kicks in. Your team wins five games in a row, but then loses a few after that. You have a string of crummy luck, and then the next few weeks are better. It rains and rains… and then it doesn’t.
In investing, extreme prices move up or down and return to their average like a rubber band. Stretch it, and when you let go, it returns to its original shape. That’s mean reversion.
The good news about things going against you for what feels like forever is that, eventually, your luck turns… And the reverse is true too… What feels like a run of happy luck will also eventually run out.
Whether it’s a share price on a streak that doesn’t make sense… markets that levitate for what feels like forever… sooner or later, they revert to the mean. Expect it and plan for it – rather than be surprised by it.
And what’s long overdue to revert to the mean? U.S. market share prices. Over the past decade, the S&P 500 Index has returned 16.4% per year (and 28% over the past year). But over the past 50 years, it’s returned 11.1% per year… and 10.8% per year over the past century.
If history is any guide, at some point – when mean reversion kicks in – the S&P 500 is going to suffer through an extended period of performance that’s lousy by recent standards… but a stretch that will be perfectly normal by mean-reversion standards. Get ready for it.
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Executive Editor, American Consequences
With Editorial Staff
December 28, 2021