Four Big Truths that Can Bring Clarity to Your Investing

Whitewater rafting can be exhilarating—the wilderness setting, the unique view you can only get from the river, and the thrill of feeling yourself propelled along by the roaring water.

However, even with an experienced guide, you can find yourself feeling out of control as your raft is bounced and spun around. You can be soaked by a cascade of frigid water. And if the rapids really get going, you might even find yourself tossed out of the boat.

In the middle of this expensive excursion that took a lot of trouble to get to, you might wonder, “Why did I sign up for this?”

You can get the same feeling when investing. It takes effort, discipline, and even sacrifice to save a significant portion of your income for retirement. And sometimes, especially in the short-term, being in the stock market can feel like going through Class V rapids.

About a year ago, when the market was leaving even long-term investors with a lot of uncertainty, Vanguard published an article about the four principles to remember when things aren’t going the way you expected—specifically about the value of diversification.

Here they are, greatly summarized.

  1. Diversification is not dead. Unless you have a crystal ball, owning a widely diverse portfolio continues to be the most prudent way to reach your goal over the long term. Also, diversification won’t look the same for any two investors. How you diversify depends on your unique risk tolerance, timeline, and specific goals.
  2. Diversification is not a set it and forget it process. It requires rebalancing, reassessing, and continued discipline.
  3. Expect the unexpected. Because future conditions could be better or worse than the past, even a cycle that seems to be repeating will be full of surprises.
  4. While returns are important, goals matter most. You can’t control market returns. But you can control what you want your goals to be and how you will behave to achieve them.

Whether it’s a raging bull market or a nerve-wracking correction, it’s important to focus on the “why” that guides all of your investing actions.

Thinking back to our whitewater rafting example, there are any number of ways to make it through a set of rapids. You may ride through without getting your hair wet. Or you may end up underneath an overturned raft. Regardless, there’s always calm water below, and your experienced guide will get everybody back together and ready to continue your trip.

The point is, when you got in the boat, you knew there would be rapids. That was one of the reasons you chose this trip. So, you dressed appropriately, buckled on a life vest, and listened to your guide. Sure, the water’s a little chilly. But that’s part of what makes it an adventure. And at the end of the day you can say, “I did that.”

On any given day, the market might be moving along like a lazy river or thrashing violently over boulders. Regardless, the prudent investor remembers that in order to participate in the potential rewards of the market, he or she is also accepting the downtimes as well. They are both to be expected as part of a long-term journey.