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Principles of Sound Investing: Courage

A historical perspective can help inform and guide investment decisions. In a recent blog post, I shared how this combined with the investing principle of consistency was the best way I’ve found to increase your returns. But it doesn’t stop there. Maintaining that disciplined perspective often requires that we exercise the principle of courage in investing, especially during times of uncertainty and fear.

Every Generation Faces Challenges...Have the Courage to Stay With It

Each generation faces challenges that often appear both unique and overwhelming, but when viewed through the sobering lens of history, we find they are neither. Today, we face any number of challenges which, while significant, are arguably no more daunting than: A global depression, two world wars, the Cold War, the assassination of one president and the resignation of another, 9/11.

And yet the market has continued its inexorable climb. After all, humans are remarkably resilient, as well as masterful inventors and innovators, often striving to make a better place for themselves, their families, and their societies. That’s why courage to persevere through adverse times, while sometimes challenging to summon, is a key component to wise investing. There will usually be an upswing if you have the fortitude and willpower to weather the storm.

Market corrections happen fairly often and even in the good years, including fairly significant intra-year declines in recent strong-return years like 2010 and 2012. From 1984 to 2019, the S&P 500 Index experienced at least a 5% intra-year decline in every year but two. The median intra-year decline over the past 36 years has actually been –9.6%

That said, equities have still posted positive returns in 30 of those last 36 years with median annualized total returns over that period of 14.4%. The bottom line is that market corrections do not equal a financial loss unless you sell. Again, relying on courage as a sound investing principle will allow you to gain better returns in the long run.

Choose the Best Asset Class for the Maximum Return

Stocks have outperformed most asset classes, outperforming bonds over rolling monthly 15-year periods from 1978–2019 (e.g., January 1978 to December 1992, February 1978 to January 1993, all the way up to January 2005 to December 2019) 85% of the time. For investors with a growth objective, there are few (if any) better alternatives to stocks.

At the top of every mountain is a summit. A recent high in the market is often referred to as a “peak.” What isn’t defined in markets, though, is the whole mountain range and whether there are any taller mountains after the current one. 

Having a solid grasp of historical markers plus the investing principles of consistency and courage will help you to maximize your investment.  History shows us that there have been many previous peaks, and even after gaps of many years, taller ones have appeared.

Buy When There is Blood in the Streets

An old adage says to buy when there is blood in the streets. This is often easier said than done and, of course, does not have a perfect track record. Still, a key tenet in the principle of courage is to be greedy when others are fearful.

While that may seem...well, greedy, it truly isn’t. Investing in markets when there is blood in the streets (figuratively with high-profile financial crises but more literally in other cases) has arguably proved to be sage investment practice. This requires knowledge of investment principle and a hefty dose of courage to run into the fire when others are running away from the building, so to speak.

Bear Markets Require Courage

The vast majority of stock market bears, like most actual bear encounters, might be a shock to the system but are not actually life-threatening. Whether minor corrections or major selloffs, negative years only represented 26% of the long-term experience of the stock market since 1901 (and this includes the Great Depression, of course). And even with those bear markets included, the average annual return over that period was 11.5%.

Even if you look at our more recent history since 1945, there have been over 892 months, of which only 97 have given us a 20% downturn or greater (around 11% of the time), all of which inevitably recovered and climbed to new highs.

Bond prices remained relatively steady over time, in spite of the inevitable crises that periodically hit the financial system. (As the old saying goes, “the difference between bonds and men...is that bonds ultimately mature.”) The return from both categories of bonds comes from the income, not from price appreciation. When in doubt, forget about price and focus on income.

At The End of the Day…

Some investing principles, like consistency and courage, are more about knowledge of how the market historically performs rather than what is happening right at this very moment. Consistency asks you to maintain a certain level of steadiness in what you’re investing in and the amount you’re investing.

On the other hand, the investing principle of courage, asks you to summon your confidence and calmness to act with clear-headed resolve when times are rough and not to let go of your consistency when times are good. Investing requires you to balance the good with the bad to maintain a steady balance.

I’d encourage you to take my free assessment to see if you’re on track for building the financial wealth you need to live your best life and apply the investing principle of courage when investing so you can maximize your wealth in the long term.

Learn about the other two principles of sound investing, consistency and balance!

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