I’m always intrigued when talking for the first time with someone new about investing. So many are so cynical and skeptical about the whole subject. Sometimes that’s because of the many bad experiences their friends or colleagues have shared with them. Other times this is the product of their own losses or disappointments from past investing ventures. They’ll often dismiss the whole concept with “the stock market is just gambling (or rigged)” or “I tried that and took a huge loss in XYZ”. They’ll also champion some idea or scheme like “I only invest in [Real Estate, or Trust Deeds, or Insure CD’s, etc.], they never lose money!”
They often become so adamant about their point of view that I have to wonder what happened in their past to generate such strong feelings, such certainty about their views on investing. I also wonder why they are sharing these feelings with me, an investment (and financial) professional who has been investing millions of dollars, for clients and myself, in the stock and bond markets for well over 40 years. Do they expect that I’ll finally concede that they are right and that I’ve been kidding (a nice way of describing this) myself and others about the potential to do well in the traditional financial markets?
Like most human defensiveness, I believe their negative attitudes are because they are scared. Afraid of not knowing where to start investing, not sure who they can trust to guide them and the fear of financial risk and ultimately the fear of failure. Past missteps, and perhaps some bad advice by those they may have followed, rightly lead them to great skepticism, lack of trust, and often to a simplistic approach to investing that they believe can’t hurt them any further.
So, how does one invest successfully through time focused on financial assets? What experiences should one expect to have now and in the future? How can one become confident that the approach being used will lead to the results desired?
Key Ideas to Consider:
First and foremost, no one can accurately predict the future – at least for the things that are not certain (unlike the sun rising again tomorrow). One may make a prediction, and that may prove to be right. But if we make enough predictions some, often many, will not be right, and thus, depending on the accuracy of these predictions is bound to let us down at some point – often with devastating consequences. Investing in certain stocks based on these predictions often leads to disappointments due to their inaccuracy. Additionally, “timing” these investments (or the ‘market’) where one chooses entry and exit points based on a prediction of future change is also most likely to produce poor results. This is simply the product of an overly complex world where way too many variables acted upon by so many different investors rarely lead to expected outcomes.
One needs to accept this premise then – that we will not be successful through time with predictions about a stock (or bond), the economy, the markets, political events, or the world.
First, let’s acknowledge that all investments have some sort of risk, and some of these risks are liquidity risks, market risks, business or industry risks, political risks, geographic risks, inflation (purchasing power) risks, currency risks, reinvestment risks, and default risks. There is no one “ideal” investment for all times. And just as we can’t predict the future, we can’t guarantee the long run results of any investment or investment strategy.
So here are the keys that most likely will lead to making money through time:
Key One: Create and Implement consistently through time a strategy that you understand, believe in, and trust. (A good professional will help do this with you). Adopt reasonable growth targets for your strategy – do not expect outsized returns over any period.
Key Two: Broadly diversify the holdings in your portfolio, regardless of its size. Deliberately allocate to desired markets and rebalance when values move away from target, at least once per year.
Key Three: Do not take more market risk (the potential for negative short-term results beyond your tolerance) than you are comfortable living with through time – year in and year out.
Key Four: Used “Indexed” based investment vehicles rather than picking securities (yourself, your advisor, or a professional money manager).
Key Five: Invest only in well known, transparent securities and markets that, through adequate liquidity, provide accurate values to know what you own and what you can realize on short notice.
Key Six: Go back to key one (implement consistently through time – this means many years).
Finally, pay attention to your strategy and its results over time. Rebalance as needed (not due to “predictions”). Determine if your risk-taking level is still appropriate for your situation and needs. Hire a professional advisor who will help you do all of this regularly over time – it will be well worth the cost.
As indicated earlier, there can be no guarantees about future results, but this approach can help you make money more consistently through time and get you where you want to be.
If you feel you would like to review your financial strategy with an advisor that is easy to talk to, please contact me to discuss your goals. firstname.lastname@example.org.