Ideally, we would all like to see our investments do well every day, week, month and year. Realistically, there is no singular investment approach, no matter how good, that will lead to good investment results all the time. Another way to say this is that nobody, no matter how good, will bat 100% when it comes to making investment decisions. Rather, good investment strategies are designed to succeed much of the time, but will nevertheless produce disappointing results from time to time (sometimes for stretches as long as one to two years). This is because investment styles, like stocks, go in and out of favor.
Unless you understand from the start that no investment strategy will produce satisfactory progress at all times, you will be under tremendous pressure emotionally to abandon time-tested, satisfactory investment approaches during inevitable periods of lackluster progress/disappointment in favor of the “style du jour” that happens to be “working” for the moment. Doing so would be hazardous to your financial health. Recognizing in advance the limitation that even good investment approaches cannot realistically do well all the time will help you resist abandoning time-tested sensible investment strategies because of transitory issues. Similarly, you also need to recognize that bad investment approaches, no matter how poor, will not fail all the time. Hopping onto a strategy that happens to be working at the time tells you nothing about whether that strategy is a good one or the progress is sustainable. You run the risk of jumping on just when the progress is about to deteriorate.
A metaphor might help illustrate how having the correct expectations about the limitations of good investment strategies increases the chance of making appropriate financial decisions. Let’s say you have never flown on a plane before, but you need to fly across country to attend an important meeting--driving will take too long. The flight will stop at a couple of places on the way to its destination. If you board the plane expecting a perfectly smooth ride because you’re “riding on air,” you will be very tempted to disembark at one of the interim stops without reaching your destination if unexpected bad weather or turbulence unnerve you. However, you are more likely to stick with your original flight plans, if ahead of time you understand and expect turbulence and poor weather are an inevitable part of the flying experience, and a bumpy ride for part of the journey “goes with the territory” and does not mean you should change your original plans.
Using yet another metaphor, the investment process to build wealth over time is kind of like a marathon; you want a sustainable pace so you can get to the finish line (though you’ll encounter some inevitable bumps and detours along the way), not an erratic sprint that makes you look good over short distances but will burn you out before reaching the finish line. That’s why we keep reminding clients that short-term results, good or bad, are not particularly meaningful or necessarily indicative of long-term progress.