Introduction
Today, we’re going to take a journey through time, identifying lessons from history that can help us become better investors. The world of financial markets may be more complex today than ever before, but there is still so much we can learn from the past that can help us in the present day. As the famous American philosopher George Santayana once said, “Those who cannot remember the past are condemned to repeat it.” So, let’s take a look back through history and see what lessons we can learn to invest better today.
Major Historical Events and Their Impact on Investing
Tulip Mania (1636-1637):
The tale of Tulip Mania is more than just the story of a market frenzy over colorful bulbs. It’s a story about the dangers of speculative bubbles and the repercussions of putting all of one’s investment eggs into a singular, risky basket. With tulip bulb prices soaring to the point where one bulb held the value of a well-appointed house, the subsequent market crash was devastating for those who staked everything on the tulip market.
South Sea Bubble (1720):
The South Sea Company’s story illustrates the perils of speculation and overconfidence and how quickly we can forget the lessons of major hysterias like Tulip Mania. This British trading venture’s stock prices skyrocketed due to intense speculation, only to dramatically burst when reality just couldn’t keep up with investors’ lofty and irrational expectations.
Wall Street Crash of 1929:
The catastrophic Wall Street Crash of 1929 served as a brutal lesson in risk management. This monumental event, marking the onset of the Great Depression, demonstrated the devastating potential of unchecked market speculation and over-leveraged positions. The rapid stock market decline led to widespread bankruptcies and unemployment, sparking a decade-long economic downturn.
Dot-Com Bubble (1997-2000):
The late 1990s’ dot-com bubble was a testament to the dangers of hype and irrational exuberance. With the internet’s rapid growth, investors threw caution to the wind and funneled money into internet companies, many of which lacked profitability or sustainable business models. When the bubble inevitably burst, many companies collapsed, leaving investors with unprecedented losses.
Global Financial Crisis (2007-2009):
The Global Financial Crisis (GFC) perhaps needs no further explanation, but it undoubtedly serves as a stark reminder of the cyclical nature of markets. Triggered by the bursting of the US housing bubble, the subsequent chain reaction caused massive financial institution failures, a severe recession, and a global credit crunch that traumatized the global financial system.
Flash Crash (2010):
The 2010 Flash Crash was a harsh lesson in the potential perils of algorithmic trading. This unexpected and sharp drop in U.S. stock market prices, although temporary, caused panic among investors. It exposed vulnerabilities in market structures and the impact of high-frequency trading algorithms on market stability, stressing the importance of managing technological risks in today’s automated trading environment.
COVID-19 Crash (2020):
The COVID-19 Crash is likely fresh in all of our minds, but still warrants some discussion. If nothing else, the pandemic demonstrated the influence of global interconnectedness on market volatility. The pandemic’s spread caused a substantial downturn in global financial markets due to lockdown measures and economic uncertainty. Though government interventions and central bank actions helped stabilize markets, the crash highlighted the value of a diversified portfolio in weathering such black swan events.
Our Timeless Lessons from History
Although we have already hinted at many of the most important lessons history can teach us, it’s worth diving deeper into these fundamental principles so we can really put them into practice.
Diversification: Don’t Put All Your Eggs in One Basket
History has shown markets to be inherently unpredictable. You never know what major events will impact the economy or which markets will ascend to greatness or fall from grace, so it’s crucial to spread your risk wisely and diversify. Diversification is a term you’ve likely heard in any investing conversation, and for a good reason. It’s the practice of spreading your investments across different asset classes and sectors to reduce exposure to any single investment’s volatility and potential losses. Imagine your investments as a carton of eggs. If you place the carton on one spot and it drops, you risk losing all the eggs. But if you place each egg in a different spot, dropping one won’t cause the loss of the others.
For instance, consider a portfolio composed entirely of tech stocks. If the tech sector suddenly experiences a downturn, your entire portfolio could suffer significant losses. However, if you diversify by also investing in healthcare stocks, bonds, real estate, and international markets, a downturn in one area could be offset by stability or growth in another. This strategy reduces the potential damage of any one investment performing poorly.
Patience: Time in the Market, Not Timing the Market
Investing is not about making quick profits; it’s about building wealth over time. History has consistently demonstrated that long-term investing often yields the best results, despite short-term market fluctuations. For example, even if you’d invested in the S&P 500 at the peak before the 2008 financial crisis, you would still have made a significant return if you’d held onto your investments until today.
Trying to time the market – that is, buying and selling based on short-term predictions like the next crisis or market fad – is notoriously difficult, even for professionals. We like to focus on the big events in history through the luxury of hindsight, but buying and selling on a whim is rarely an effective long-term strategy. Instead, consistently investing and holding those investments for the long term allows you to ride out market volatility and benefit from the general upward trend of markets over time.
Compound Interest: The Eighth Wonder of the World
This next lesson is similar to the previous, but it’s so important it’s worth underscoring. Fortunes are made and lost every few years in the world of investing, but the lasting fortunes are those built by investors who cut out the noise and ride the magic of compound interest. Albert Einstein reportedly called compound interest the eighth wonder of the world, and it’s not hard to see why. It’s the principle that allows your earnings to generate even more earnings over time, accelerating the growth of your savings or investments.
Let’s say you invest $5,000 at a return rate of 5% per annum. In the first year, you earn $250 ($5000 x 5%). If you reinvest that, the next year you’re earning interest on $5250, not just your original $5000. Over 20 years, with the interest compounded annually, your initial investment would more than double to approximately $13,267, without you adding any more money to it.
The history of the market is long and complex, filled with endless waves of gains and losses. But if history has taught us anything, it’s that compound interest weathers it all.
Risk Management: Protecting Against the Downside
It only takes one financial crisis to remind us of the importance of managing risk. Risk management in investing is all about protecting yourself against adverse market movements that could lead to significant losses. It’s the financial equivalent of wearing a seatbelt while driving. You don’t expect to have an accident, but if you do, that seatbelt can prevent severe harm.
Diversification is a key part of risk management – by not relying too heavily on any single investment, you reduce the risk of severe losses. But other strategies are also important, such as setting a stop-loss order to limit potential losses on a particular investment, or investing in “safe haven” assets like bonds that tend to perform well during market downturns.
There are endless ways to limit your risk in markets, just remember, managing risk doesn’t mean avoiding it entirely – without risk, there’s limited potential for returns. But understanding and managing risk allows you to invest more confidently and securely. Perhaps more importantly, it helps you stay in the game.
Conclusion
History doesn’t predict the future, but it does provide valuable context. As we embark on our own investment journeys, let’s not forget the wisdom that history offers us. Let’s diversify our portfolios, be patient, harness the power of compound interest, and manage our risks carefully. Let’s be diligent in our research, grounded in our decisions, and open to learning from the past.
Every investor makes mistakes, but the wisest investors are those who learn from them – their own and others’. In the words of famed investor Warren Buffett, “It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.”
If you have any questions, give us a call!
Have a great weekend!
Source: Ballentine Capital Advisors
Golf Tip of the Week
Rules of Golf Review: Do I Get Relief From Aeration Holes?
It’s springtime, which means among other things that your golf-course superintendent is probably trying to gussy up his or her place for the prime summer months. During this transitional period, you’ll likely have to putt through top-dressing sand, deal with bare lies and, the worst, navigate your ball past thousands of aeration holes.
It might occur to you that aeration holes should be treated as ground under repair, meaning you can move your ball if it gets stuck in one. Sorry. Not so.
The Rules of Golf says aeration holes are a normal part of golf-course conditions. Specifically, they “do not fall within the meaning of a hole made by the maintenance staff, and thus are not ground under repair.”
What that translates to is that you can’t repair them on the green (or anywhere else on the course) and you can’t take relief from them. If you play from the wrong place after moving the ball out of an aeration hole, or use your divot tool to repair one on your putting line, it’s officially a two-stroke penalty or loss of hole in match play (general penalty).
This might seem really unfair, especially when these holes negatively effect what would otherwise be a good shot. So what can be done? A committee may choose to use a local rule to give relief (Model Local Rule E-4). If this local rule is in effect, you may take free relief when your ball lies in or touches an aeration hole in the general area or on the putting green. That relief does not apply to any holes that interfere with your stance or line of play.
Meanwhile, if you’re just playing a friendly match with your buddies, you might decide you are your own “committee” and put the MLR in place, too (we won’t tell anybody).
Tip adapted from golf digest.comi
Recipe of the Week
Garlic Butter Shrimp And Corn Sheet Pan Dinner
4 Servings
Ingredients
- 4 ears of corn, shucked and kernels removed
- 1 bulb fennel, cored and thinly sliced, plus 1/4 cup fennel fronds
- 1 tablespoon olive oil
- Kosher salt
- 1/2 teaspoon crushed red pepper flakes
- 6 tablespoons unsalted butter, melted
- 4 cloves garlic, minced
- Zest of 1 lemon, plus wedges for serving
- 1 1/4 pounds large peeled and deveined shrimp, tails removed
- 1 pint of cherry tomatoes (about 10 ounces)
- 1/2 cup crumbled feta
- 1/2 cup lightly packed fresh basil leaves, torn
Instructions
- Preheat the oven to broil and line a rimmed baking sheet with aluminum foil.
- Toss the corn, fennel, olive oil, 1/2 teaspoon salt, and 1/4 teaspoon of the red pepper flakes on the prepared baking sheet until evenly coated and combined. Spread into an even layer. Broil until crisp-tender and starting to brown in spots, tossing halfway through about 8 minutes. Remove from the oven.
- Meanwhile, stir the melted butter, garlic, lemon zest, 1/4 teaspoon salt, and remaining 1/4 teaspoon red pepper flakes together in a medium bowl until combined. Add the shrimp and tomatoes and toss to combine. Spread the shrimp mixture on top of the corn and fennel, then broil until the shrimp are opaque throughout and the tomatoes start to burst, about 6 minutes.
- Top with the reserved fennel fronds, feta, and basil. Serve with lemon wedges for squeezing.
Recipe adapted from Foodnetwork.comii
Health Tip of the Week
Does Your Kid Need a Summer Vacation From Smartphones?
Summer vacation has begun for some families and screen use may already feel like too much.
A psychiatrist from Baylor College of Medicine in Houston offers some tips for making sure smartphones and tablets are put to good use and not used to excess.
Dr. Laurel Williams, a professor in the department of psychiatry and behavioral sciences, said no arbitrary number of hours spent online indicates addiction. She suggests parents should focus on their child’s behavior toward their phone. If something seems different or problematic, that might be a warning sign of too much screen time.
“It could be that your child is not talking to anyone at home, talking less, always spending time in their room or getting anxious or unhappy about whatever they see or do online,” Williams said in a college news release.
Kids tend to get less physical activity when they overuse devices, whether watching TV, playing video games or scrolling through social media.
They need to be active, and they also need to pursue some enrichment to make sure they are ready for their studies in the fall.
Poorer children who can’t afford to participate in summer enrichment programs often lose knowledge during the break and take longer to catch up at the start of the school year, Williams noted.
Some may not have many options other than turning to their screen for entertainment.
“If your child is engaging in mindless activities, that could be a problem academically. It’s not necessarily a bad thing to spend time on the phone, but make sure their screen activity is not causing any harm,” she said.
Williams suggests finding free online tools to play or subscription-based educational games.
Parents who can’t send their child to activities should access school resources for information on apps or websites that promote a safe, educational environment for kids, she said.
Also, show interest in your child’s educational games so they feel encouraged to continue while monitoring their progression, Williams recommends.
“Kids often want to show you what they’ve done — they want you to be proud of them. If you don’t show interest or check to see if they’ve done it, don’t be surprised if your child loses interest,” Williams said.
It’s important to track your child’s screen activity, with an eye out for bullying and negative content. Children may not realize that people are nastier when anonymous or understand the subtle cues and lack of consequences for being mean online. Using parental controls helps, but it’s still important to look at the history, Williams said.
“There is clear evidence that social media can lead to anxiety, depression and problematic eating issues, especially for girls. They see curated images of people that are not real, so it really preys on that adolescent stage where (they) want to belong,” Williams said.
Tip adapted from WebMD.comiii
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Ballentine Capital Advisors is a registered investment adviser. The advisory services of Ballentine Capital Advisors are not made available in any jurisdiction in which Ballentine Capital Advisors is not registered or is otherwise exempt from registration.
Please review Ballentine Capital Advisors Disclosure Brochure for a complete explanation of fees. Investing involves risks. Investments are not guaranteed and may lose value.
This material is prepared by Ballentine Capital Advisors for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation or any particular security, strategy, or investment product.
No representation is being made that any account will or is likely to achieve future profits or losses similar to those shown. You should not assume that investment decisions we make in the future will be profitable or equal the investment performance of the past. Past performance does not indicate future results.
Advisory services through Ballentine Capital Advisors, Inc.
i https://www.golfdigest.com/story/rules-of-golf-review-aeration-holes-putting-greens-relief
ii https://www.foodnetwork.com/recipes/food-network-kitchen/garlic-butter-shrimp-and-corn-sheet-pan-dinner-8670678
iii https://www.webmd.com/parenting/news/20230605/does-your-kid-need-a-summer-vacation-from-smartphones
