The Best Investment Advice You Will Get

Last week, I was asked by family and friends what I think they should be doing with their investments. You see, at that time, the US was in the throes of a self-afflicted government shutdown, in addition to having the nasty threat of a debt-default looming in the horizon.

Should they sell some of their assets in preparation for a possible US debt-default in which there were no real precedents and thus hold a chance of a really calamitous outcome?

My answer, as I’m wont to do, would be for them to simply keep calm and carry on. And it was then that I came across an article penned by prolific investment writer Larry Swedroe for CBS Moneywatch that contained a piece of investment advice that might be the best I’ve seen.

In the article titled “How the shutdown affects your investment plan, he wrote that crises like the US government shutdown are actually the norm and “they occur with great frequency, far greater than most investors are aware.”

As an example, here’s a sample-list of horrible events and crises that has happened in America and around the world over the past 150 years, compiled from Swedroe’s article and borrowed from Morgan Housel from the Motley Fool:

Four US presidents were assassinated; 675,000 Americans died in a single year from a flu pandemic; 33 recessions in the USA happened that lasted a cumulative 48 years; the American stock market fell more than 10% from a recent high at least 97 times; stocks lost a third of their value at least 12 times; annual inflation in the USA exceeded 7% in 20 separate years; the worst bear market since the Great Depression erupted in 1973 as oil prices soared.

You think that’s all? No, there’s more:

747 savings & loans associations failed in the USA from 1989 to 1995; the Asian financial crisis happened in 1997; Russia defaulted on its debts in 1998; in 2000-2002, the Sep 11 terrorist attacks on the World Trade Centre in New York, along with the bursting of the dot-com bubble, dragged the world into a recession and caused many stock markets to plummet; in 2007, the Great Financial Crisis begun; a Greek debt-crisis erupted in 2010; USA lost its Triple-A credit rating in 2011; in March 2013, Cyprus, a country from the Eurozone, had to request a bailout for its debt-problems.

Truth be told, the list could go on and on.

But what’s remarkable here is that throughout these terrible times, the Dow Jones Industrial Average, an American stock market barometer, has climbed from around 20 points in the 1880s to more than 15,000 points today. To help wrap your head around those numbers, that’s a 750,000% gain!

Available data for Singapore’s DJIA-equivalent, the Straits Times Index (SGX: ^STI), has a much shorter history, but it too has managed a respectable 283% gain in 25 years from 834 points at the start of 1988 to around 3,200 points today. Individual components within the index, like Keppel Corporation (SGX: BN4) and SembCorp Marine (SGX: S51), have even returned 800%-900% over the past decade.

Crises happen far more frequently than we realise. But that hasn’t stopped businesses in America, or Singapore, or other developed nations around the world, from accumulating value by producing and selling more. That build-up in value is eventually reflected in the aggregate-growth of the stock markets in the different countries.

The problem, though, is that the build-up in value and the reflection of that value in stock prices takes time. So, for individual investors to reap the rewards, they have to be in the game.

While it’s easy to say, on hindsight, that an investor’s gains could be far greater if he could side-step all the crises with grace and invest only after prices have fallen, the truth is, reality is never so neat.

Here’s what Swedroe has to say with his brilliant advice (emphases mine):

What we do know about crises [is] that they occur with great frequency. What we don’t know is when they will happen, what will be the cause, how long the bear market will last and how deep it will be?”

In other words, your investment plan must incorporate the virtual certainty that you are going to have live through many crises, perhaps about one every other year or so, and live through them with equanimity, without panicking and selling.”

We know crises will happen but we don’t know when. In order to account for that, we have to invest for the long-term knowing a crash is bound to happen someday.

My own personal investment plan consists of monthly long-term investments in shares of individual companies in my watch-list that are selling at attractive prices in relation to their value. I also keep a separate watch-list of shares that I would only buy when their prices fall sufficiently, either because of company-specific crashes or a general market decline.

Part of it also involves me generally eschewing leverage (both in the way I invest, as well as the companies I’m invested in) as I would never want to put myself at risk of being wiped-out by any inherently-unpredictable downdrafts in market conditions.

I know a crash is bound to happen someday – I just don’t know when. But, I still invest for the long-term anyway because I know it gives me great odds of success and is one of the best ways to build lasting long-term wealth.

I have been following Swedroe’s advice in the way I invest long before I read about it. Question is… will you?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.