The Butterfly Effect states that small causes can have huge effects. A butterfly flapping its wings in Borneo at the right point in space/time can cause a hurricane on the east coast of North America.
The Butterfly Effect operates in the markets. A rumor of a new gold finding in Mongolia can have a huge effect on the gold futures market, on the Nasdaq, on the S&P 500, the ETF’s that mirror it and more.
Investors are at the mercy of the Butterfly Effect. We have no control over it. Among the huge number of factors influencing market movements, we have full control of only two in our investing; our savings rate and our asset allocation.
Because of the Butterfly Effect, increasing our savings rate and parking the money likely is the best investment that we can make. A disciplined savings program starting early in life is the first of the six habits of Monday Morning Millionaires.
This recommendation is as boring as it is effective.
Equally boring an equally effective is our asset allocation. When Gerald Loeb, the most quoted man on the stock market before Warren Buffett came along, wrote his book The Battle for Investment Survival,* over 70 years ago, the expression “asset allocation” was not in use.
Loeb stated: “Indeed, should some super-solvent agency agree to preserve the buying power of capital for a substantial length of time at a stated fee per annum, informed people would embrace the plan enthusiastically if they felt there was any real possibility of the agency staying solvent.”
In Chapter 6 of his book titled How to Invest for Capital Appreciation Loeb says: “It is far better to let cash lie idle than to buy just to “keep invested” or for “income.” In fact, it is really vital—and just this one point, in my opinion, represents one of the widest differences between the successful professional and the loss-taking amateur.”
Loeb was talking about asset allocation.
The only two factors over which investors have control, our savings rate and our asset allocation, are boring and effective. As Economics Nobel laureate Paul Samuelson stated: “Investing should be dull. It shouldn’t be exciting. Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas… It is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office.”
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*Loeb, G.M. The Battle for Investment Survival, Classics Edition, p. 18. Kindle Edition.