Investors can still feel unfulfilled in these heady days for the Dow Jones Industrial Average
- Discipline is the key to harvesting returns from risk assets. Follow your plan, not the crowd.
- Research shows that patient investors will be rewarded for taking smart risks on small cap and value stocks.
- Risk and reward are related.
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…” A Tale of Two Cities–Charles Dickens
The quote above from Dickens sums up the current investment environment. Just a month ago, the headlines were full of doom and gloom as the markets experienced a correction. It turned out to be a short-lived correction and fairly typical by historical standards. But, it was still upsetting to many investors. Today, as some of the popular market indices are at or near their record highs, some investors are wondering if they are getting their fair share of the frothy returns.
During periods like these, I find it helpful to remind myself of several important principles that have made us successful investors over time. Most importantly, risk and reward are related. Over time, investors should expect to be rewarded for taking smart risks.
The academic research is clear. Investors can and should expect to be paid for taking risks on small stocks and value stocks both domestically and abroad. However, because small stocks and value stocks are risky, they don’t outperform popular large cap indices like the S&P 500 or the Dow Jones Industrial Average in every period. If they did, they wouldn’t be risky would they?
But, over reasonable time periods, exposure to these relatively risky areas of the market have rewarded investors handsomely.
It’s tempting to think that you should only be in small stocks and value stocks when they are outperforming. But, here again the research is clear. Those investments outperform when they are least expected to do so. So discipline is the key to harvesting returns from those risky assets.
At times like these, it takes discipline to avoid following the masses when they are selling small, value stocks and committing that capital to the perceived safety of the large cap S&P 500 or Dow Jones Industrial Average. Investors who have successfully avoided that temptation in past markets have been rewarded, both in terms of returns and risk management.
We recently created a video to explain the benefits of embracing small stock and value stock risk. Visit our video resources page and select the video entitled “Wealth Management Risk and Reward.”
Staying disciplined with you…