Favored for the Series, but Not Each Game

by | Oct 1, 2015 | Financial Planning, Investor Behavior

Yesterday on my drive home, I listened to Mike Francesa on 660 WFAN. I’m a big fan of his and tuning into the show has become somewhat of a ritual for me. One guy called in and asked Mike a question regarding the odds Vegas put on the 2015 Stanley Cup Finals. His gripe was that Vegas gave the Lightning better odds in Games 1 and 2, but had the Blackhawks favored to win the series. He simply couldn’t understand how this could be.

In typical Francesa fashion he handwaved the ridiculous question by explaining that Vegas makes odds for each game entirely independent of the series as a whole. Tampa Bay happened to have home ice advantage for Games 1 and 2, so they were favored. However, Chicago was considered the better team overall, so they were favored to win the series.

This got me thinking about the market and how we tend to view it. Market analysis sometimes gets so granular that we lose sight of the long term goals most portfolios are designed to help accomplish. The third quarter of this year provides an excellent example. No matter how you slice it, things were ugly for the majority of equity investors.

2015 Third Quarter Numbers

On a year to date basis, things don’t look much better. People are actually beginning to wonder if we’ll see cash outperform stocks and bonds this year. Something that Ben Carlson recently noted has:

“Actually happened twelve times over the past ninety years or so, a little more than once every decade.”

2015 YTD Numbers Through Q3

Although negative quarterly numbers and the possibility of negative year to date numbers certainly don’t invoke a warm fuzzy feeling, most investors would be best off examining where these numbers fit within their personal situation. Is each three month calendar period or year an independent entity or are they part of a much bigger whole? Quarters and years are simply one of the popular default options we have for measuring progress. Morgan Housel of The Motley Fool put it well in his recent post:

“Investing is personal. All that matters is performance between today and your end goal, not the individual years in between.”

In any given quarter or year, the market has the ability to surprise. This can be a pleasant surprise to the upside or an unpleasant trip in the other direction. However, when we stretch our time horizon over longer periods, our odds begin to look at little more like the 2015 Blackhawks: favored to take the series (which they did), but maybe not each individual game along the way. There are going to be down quarters and years for any long term investor, no matter what strategy they use. However, if you stick to your strategy, you’ll find that the odds are in your favor over the long haul.

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