1. Embrace market pricing.
Every day there are billions of dollars of trades between buyers and sellers, and someone out there is always in search of that needle in the haystack, i.e. the mispriced stock. But with the extent of trading that goes on globally, there is a buyer for every seller. In an attempt to pursue mispriced stocks, you can end up wasting a lot of time, and in some cases money, versus if you had simply embraced the market pricing across the board.
2. Don’t try to outguess the market.
History has shown that you cannot consistently outperform the markets. In the last 15 years, only 14% of U.S. equity fund managers beat the benchmarks. So, if the professionals can’t consistently outperform the benchmarks, how does an individual expect to? Over the course of your experience in finance you will encounter advisors who claim they can beat the market. Ignore them. Find yourself an advisor who can create a sustainable and long-term financial plan that’s just right for you, without any elaborate beat the market claims.
3. Resist chasing past performers.
I’ve said it before, and I’ll say it again. Past performance is not indicative of future results. Psychologically, people like to invest in winners, so it makes sense that we invest in funds that have made money in the past. However, the numbers prove that when it comes to the market, that isn’t the best thing to do. Most funds that were in the top 25% of the previous three-year returns did not maintain that top 25% ranking the following three years. What that means for you is you’ve got to resist the urge to chase, and most importantly you need to rebalance your investments, so they reflect future potential rather than past success.
4. Let the markets work for you.
Investing in the stock market is a long-term strategy, and long-term simply isn’t a year. S&P historically will be up seven years out of ten, which you must remember, and ignore the urge to think in that single year time frame. With our ability to access information so easily now, it’s harder than ever to ignore that urge but we ultimately don’t know what’s going to happen in the markets today, tomorrow, or in a few weeks. What we do know is how the market works in the long term, so let them do their job.
5. Examine your drivers of return.
When it comes to selecting stocks, there are some equity and fixed income dimensions which point to differences and expected returns. Investors can pursue a higher expected return by structuring a portfolio around some of these dimensions. On the equity side there are four: the market, company size, relative price and profitability. And on the income side you’ve got two: term and risk. Understanding these structures when you create a portfolio can help you better understand your expected rates of return.
6. Practice smart diversification.
When you begin to develop your investment strategy, you’ll come up with a portfolio that reflects your level of risk comfort. Diversification is the key to reducing risk since your assets will be touching various investment forms, and by keeping a certain level of diversification, you’re more likely to achieve your long-term financial goals.
7. Avoid market timing.
It’s impossible for us to know what market segments will outperform from year to year. There are no tools available to predict what the S&P will be doing 12 months from now. Anyone who claims to know… well it’s for publicity. Because for every one person who guesses correct, there’s someone else who got it wrong. So, ignore the media and stick to what you do know, rebalancing, diversification, and restraint are essential to obtaining your financial goals.
8. Manage your emotions.
Part of the reason people hire financial planners is because money makes us emotional. We have ties to money, and feelings beyond dollar signs and greenbacks. The result is that many people struggle to pull their emotions from their investment and see the long-term strategy. Stocks, funds, markets, none of them are inherently bad, but sometimes they simply underperform. Rather than risk damaging your financial future, take a step back and refocus on your plan. And if that’s hard to do alone, it’s why you have a financial planner.
9. Look beyond the headlines.
There are always going to be factors that move the market in a short period of time. Whether it’s a tariff deal or oil got crushed, there are many short-term events that impact the market. These kinds of events always result in stories that say sell now, looming recession, retire rich. Remember, headlines sell papers. So, when you’re reading something in your daily tribune, or across a TV screen, those words have been carefully selected for viewers. And no one who wrote it has any clue about your financial plan. Only you do. So, stick to it.
10. Focus on what you CAN control.
You can’t control the market. You can’t control the news. And you can’t control what anyone else tells you. But you CAN control the investment plan you’ve created to fit your needs, your goals and your risk tolerance. You CAN structure a portfolio along the dimensions of expected returns. You CAN diversify your portfolio. You CAN diversify globally. You CAN manage your expenses. You CAN choose to stay disciplined. So, there are a lot of things you can do (to balance the nine things to avoid). If you keep your focus on what you can do, you’ll be a lot less focused on the things you shouldn’t.
For an depth downloadable PDF takeaway on this topic click here: Pursuing a Better Investment Experience.pdf
Refer to this in the future if ever you need a gentle reminder!