The Original Sin of Investing

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By Steve Martin

In the Book of Genesis, God gives Adam and Eve dominion over all the Earth, prohibiting them only from tasting the fruit of good and evil. For a moment, their innocence is perfect.

Then, being only human, they succumb, and bite into the apple. This transgression, when they committed it, was followed by everything bad about earthly life rushing into the world: sin, shame, sickness and death. They just made one mistake, but it was the one and only thing they were forbidden to do. Over the next several thousand years, many more sins would follow, but this was the Original Sin, and it lead – or quite possibly caused – all the others.

Similarly, when it comes to investing, I believe there is but one “sin” that leads to all the others.  I call it the “Original Sin of Investing.”

Successful investing is a lot like that paradise. Long-term investing aims to achieve the most cherished lifetime goals of the family. There’s a harmony about goal-driven investing. And as long as the portfolio remains the servant of the plan, harmony reigns.

But then, being only human, having watched equity markets rise year after year, they begin to hear the “serpent” of the markets. He whispers quietly at first, “You can beat this thing. You don’t have to be tied to principles (like asset allocation and diversification).” Over time, he proclaims more loudly, “You are smart, and you’ll be able to get out before the next downturn. You can outperform.”

This “outperformance sin” usually leads to many other financial miscues: not saving enough, spending too much, avoiding proper estate and tax planning, bets on risky investments, etc. Often it stems from not having a financial planner savvy enough to help clearly define goals and the tools to calculate the returns/income needed to meet them.

When planning is done holistically, the investment returns needed – to do everything you ever wanted – might be much lower than you think.

Adam & Eve chose not to act according to the advice they were given. Whether you have a competent financial advisor or not, you can learn from others who have responded to the markets successfully and learn how they handled their “serpent.”

From a purely mathematical perspective, if $100,000 compounds at 10% for 20 years, it grows to $672,749. If that was the real return of a hypothetical stock investment over the past 20 years and had you owned it, you surely would have seen some big ups and downs to achieve that return. But to have your money grow to well over 600% of your original investment, you would have had to do one thing: Nothing.  You would have captured the “ups” by living through the “downs.”

This dilemma was well-illustrated in our blog: “Don’t Follow The Lemmings,” written shortly after the end of the 2000-2010 decade.  It noted that, while the S&P 500 averaged only about 2% per year, the best performing mutual fund over that same time period averaged close to 17% per year. However, the average investor in that fund lost money. Stop and read that again.

How is this possible? They tried to outperform. They thought they could execute consistently superior selection and timing.

When we “bite into the apple” of outperformance – when the focus of our portfolio shifts away from our financial goals and onto the market itself – we commit the original investment sin. Then every classic, return-destroying, behavior to which human nature is prey comes rushing into our financial, and even or emotional, lives.

The serpent’s name is Outperformance.  It brings with it the illusion of consistently superior selection and timing…and it has come into your garden to destroy you. Don’t listen to it. Find a Certified Financial Planner and listen to them instead.

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