It’s hard to get away. Once a year we take the kids on vacation to Florida. The destination is Jupiter. It is warm, calm and relaxing. Or as I like to think of it, the same as home but with better weather, a beach and a swimming pool.
This year the kids had swimming lessons. Every day the instructor would walk around the side of the house at 11:30 A.M. sharp. She’d spend thirty minutes with each kid. At first, they were scared to death. Kicking and screaming and crying and whining. The fear and discomfort were palpable. When the teacher wasn’t at the pool the kids would stay away. After five days something changed.
It was a miraculous change.
The kids learned. They were swimming. They got it.
But what was it? Safety.
The more trust they had in their teacher, the safer they felt and the better they became. Soon, our two-year-old would jump off the edge, get himself back to the surface, grab the wall and pull himself out. The fear dissipated, trust and competence increased and they knew what to do. We felt settled and so did the kids.
Investing is a lot like learning to swim. At first the rapid changes in price scare us. How can my $1,000,000 suddenly be worth only $800,000? Why don’t my international stock funds ever seem to go up? Watching investments go down feels a lot falling into a pool and not being able to get your head out of water. It’s a sinking feeling. Yet, over time we develop an understanding, a comfort in knowing that what is scary in the short-term is not necessarily representative of the long-term. In the long-term our investments should go up.
Nevertheless, the market can be wacky in the short run. Prices drop or rise without reason. Stocks drop but bonds stay put or go up. Through constant application we become familiar with the volatility. We understand why we diversify. It’s not as scary.
For instance, the chart below shows nearly 20 years of returns for the Vanguard Balanced Fund (VBIAX), a 60% stock and 40% bond portfolio. Point to point an initial investment of $10,000 has turned into $30,540. A triple! Yet, at several times panic set in and at other times it felt like it was going nowhere. Being able to remain calm was crucial to capturing the return of the fund.
A good adviser is like a good swim coach. We educate. We teach. When the unknown strikes we know what to do. We help you take the right action or no action at all. You feel settled and safe and confident you will reach your goals. In other words, the flailing stops and you calmly swim to the side and pull yourself out.
Learning new things is hard but the effort is worth it. A good understanding of why things work is a necessary condition to doing well.