The Vulcan Investor

The most challenging task for any investor is to suppress and detach emotions when making financial decisions. It's not easy; you are only human after all. Yet the best investors approach the markets with a Vulcan-like mindset (for you Trekkies out there), utilizing logic, data points, and fundamental research to lead the way in their decision-making process. It is a skill set that takes years to develop unless emotional suppression comes easy for you. But for most of us, we need to train our minds to react slowly and carefully when processing information that can affect our money.

It is a highly emotional time these days. Turning on the news and seeing the courageous people of Ukraine take a stand against an evil tyrant, watching the numbers on the gas pump continue higher and higher as you stand squeezing the nozzle, hearing constant media interviews of doom and gloom forecasts… it's enough to rattle even the great Mr. Spock. Most of the time, the best solution is to turn off the tv, break away from social media, take a deep breath and do nothing. Of course, no one really wants to hear that. You might even say, "What am I paying you for?" Well, as well-known investor Benjamin Graham once said, "The investor's chief problem – and even his worst enemy – is likely to be himself." Our job description includes helping you avoid the tendency to act irrational and in ways that are not in your best interest. Sometimes doing "nothing" is the absolute best course of action to take. If you think about the broad stock market logically and without emotion, you will see that EVERY correction, small or large, fully recovered over time. Whether that time was one week, one month, one year, or even an emotionally painful ten years (as was the case from 2000 to 2010)… it always recovered.

Now I know what you are thinking. "I don't have, nor want, to wait ten years to recover." I get it. And believe me when I say, I do not think we are anywhere near this type of stock market scenario now. But, if this type of prolonged bear market occurs again, what would a logical Vulcan investor do? Well, that depends.

Suppose you are in the "Accumulation Phase" of your wealth cycle, meaning you are still working and saving for retirement. In that case, you should be looking at any market pullbacks as an opportunity to purchase stocks at lower prices. Your emotions will tell you to sell stocks when they fall. But, a Vulcan will not understand how this makes any sense since it is always better to pay less for an asset. For example, if you started with $100,000 invested in the year 2000 and contributed $1,500 a month in your retirement account, even with ten years of flat stock market returns, today you would have over $1.6 million in your retirement account.

If you are in the "Distribution Phase" of your wealth cycle, meaning you are now retired and living off of your investments. Assuming you have implemented a dividend-focused portfolio strategy, price volatility matters less since you rely on the investment income to meet your retirement expenses. Let's say that you retired in 2003 and invested $1,000,000 in the iShares Select Dividend ETF (DVY) the day it launched on November 7th, 2003, purchasing 19,704 shares at $50.75 a share. Ten years later, and after touching a low of $26.27 (down 48%) in 2009, DVY closed at $69.59 on November 7th, 2013. The price alone gained only 37% over those ten years. However, you would have received an additional $394,000 in cash dividend payments over that decade to pay for your retirement expenses. Despite the massive volatility, a Vulcan investor would conclude that it was a successful ten years since retirement expenses were met by the cash dividend payments. Oh, by the way, DVY has now doubled in price and would have paid out approximately $500,000 more in dividends on your original investment since 2003. Not bad.

The lesson here is to choose logic over emotions. Emotional decisions are costly and avoidable if you take a step back and keep your eye on the bigger picture. Expect markets to be volatile. View pullbacks as opportunities. Seek investment income for retirement security. We cannot control the markets; however, we can control how we react to them. Be a Vulcan investor, live long, and prosper.