It's been a wild year for investors. But the basic tenets of buy-and-hold investing still ring true.

Dear Fellow Fool Funds Shareholder:

A brief history of human civilization: For two millennia we were hunter-gatherers, and for the next two millennia we were primarily farmers. And then Lewis Ranieri invented the mortgage-backed security, and that’s when things went all pear-shaped.

Through all of these periods of history, one thing has remained a dead-on certainty: The inexorable growth of the human condition has been and will always be interrupted by periods of terrible suffering.

Sure, a 40% drop in the stock market is not quite at the same level of a locust swarm eating all of your crops, or “where the hell did all of the wild boar go?” But it still represents a substantial reduction in one’s station and tends to come along with certain side effects that can be devastating.

We don’t really hunt or gather much anymore. Our economy is no longer defined by farming, though lots of us do it. But finance is a core element of our economic well-being. And the 2008 crisis, precipitated as it was by mutations of Lewis Ranieri’s brainchild, tells us that finance is susceptible to its own form of unexpected scarcity.

If that doesn’t make you afraid … well, it should.

Fear is powerful, and utterly innate. And while we might think of fear as a feeling, and a feeling as being an irrational response, you can imagine the incredible stupidity that someone devoid of fear could be capable of. “Why wouldn’t I hug a polar bear?” “Why, that mushroom you just picked off the forest floor looks delicious!” That kind of thing.

The feeling of fear can also cause you to do things that are incredibly self-destructive.

As I write this in early December 2016, the U.S. stock market is at all-time highs, as measured by the Dow Jones Industrial Average, the S&P 500, the Nasdaq, and the Russell 2000. This year also gave us an object lesson for why trying to time the market is so costly. After all, the first six weeks of 2016 brought one of almost relentless drops throughout the stock market. It was, according to the people who pontificate on such things, the worst start to a year ever — and it was pretty easy at that time to come up with lots of extremely smart-sounding reasons why one should take some money off the table. Every time the market drops 15%, the easiest thing for us to do is visualize it going much lower.

What’s happened since then, of course, is that the U.S. stock markets (and even more so the “more risky” emerging markets) have risen markedly, with the Russell 2000 rising more than 40% between the February lows and the end of November, the Nasdaq 100 rising 25%-plus, the S&P 500 more than 20%. Why did the markets go up so much? No one knows. But imagine the difference in your financial situation today if you’d succumbed to the fear and sold in February!

At Motley Fool Funds, we view our job as being twofold: to find and invest in the best companies we can on your behalf, and also to help you make better financial decisions through our frequent communications with you, both of which we do with a view toward the long term. Under no circumstances do we ever try to time the market. We can’t. Neither can you.

Here’s the reality about buy-and-hold investing, though. For you to succeed at it, you must be comfortable with seeing your stock portfolio drop by 30% or more — and not just theoretically, superficially comfortable, but comfortable down to your core. Think of it this scenario in dollar terms: If you have a $500,000 portfolio with a classic 60/40 split of stocks and bonds and the market drops 30%, your portfolio will lose $90,000.

If that’s not a reality that you can stomach, the stock component of your portfolio needs to be smaller, because it is a near certainty that the time you’ll be most likely to decrease your weighting to stocks is in the aftermath of their having already declined. I’m not saying this to you because I know you – I’m saying this to you because you are human.

Our job as investors is to help you maximize the returns you can generate, and the “you” part is really important, because your tolerance for loss is not something we can help you with. Back in January, when things seemed bleak, I encouraged investors to write down how they felt at that moment, because that was an accurate gauge of their risk tolerance.

We believe firmly that focusing on building a portfolio of companies that we believe have the potential for generating market-beating returns over the long term is the best way to maximize what we are capable of doing for you. That means ignoring both market fads and the temptation to use the fear and greed of other investors to our advantage. After all, we launched our first fund in 2009, a time in which the average market participant was terrified. Today many of those same participants are euphoric. Rest assured that our approach to investing hasn’t changed, though where we find opportunity certainly has. Maybe, after all, we’re not so different from the hunter-gatherers of yore.

(Note: Securities in the Funds do no match those of the indexes and performance  will differ. Is not possible to invest directly into an index.  The hypothetical example is meant to demonstrate a basic compounding principal. It does not represent or predict the performance of any investment and does not take into account taxes, fees or charges associated with an investment. There can be no guarantee that any strategy will be successful. All investing involves risk, including potential loss of principal.)

As always, my entire team and I thank you for your faith in us.


Bill Mann

Bill Mann

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