Most people I first meet with ask me “Where is the best place for me to put my money?” With the expectation of a silver bullet that is going to grow significantly every year. The truth is…that is available to you and to everyone, you just have to not get in the way of it. If you invested $1,000 in the S&P 500 index in 1970 and just left it there until 2014 it would have grown to $88,454! Pretty good, however if you missed just the 25 best single days during that time frame it would have only grown to $21,070. Still not bad. But the $70,000 difference could have meant the difference between reaching and fulfilling goals or living with financial stress. People miss days when they make reactions and decisions to make unnecessary adjustments to their investment account. i.e. “is now a good time to get in or get out of the market.” Dalbar does a study every year to show what the average return of the market is and what the average investor actual return is: for the year ending 2009 the market from 1990-2009 returned 7.9% and the average investor returned only 3.2%. The consequences of poor decision making!
The 3 mistakes people make that hurt their investment experience are: stock picking, market timing, and track record investing. Stock picking is trying to pick a certain company to outperform all others (think hot stock tip) most don’t outperform the whole market but you end of taking on significant more risk. Market timing is trying to predict when is a good time to get in or get out of the market, most people say this is impossible unless you are psychic. The final one is track record investing, this is thinking that something or someone who has performed in the past is going to continue to do so in the future. Have you ever seen “past performance is no indication of future results.” A recent example is bitcoin.
There are 3 simple rules to follow in investing: Invest in stocks according to your personal risk tolerance, diversify globally, and rebalance. You should know what the historical worst case scenario is for your investment portfolio before investing in it and how much risk is involved. Diversification has been shown to decrease market risk while simultaneously increasing your return. Globally diversifying means investing in all companies across the globe, small, large, value, growth. Almost all portfolio’s I see are invested heavily in Large Growth US companies, which is one type of asset class, even if you are in 500 large US companies it does not offer true diversification. Finally Rebalance is another portfolio tool that can reduce risk and increase potential return. An example of rebalancing is if your stocks have risen in value to 60% of your portfolio but they should only be 50% then you sell 10% of your stock positions and buy more bonds to get you back to your original investment profile. Think buy low, sell high.
These 3 rules are based on Academic Nobel Prize winning research such as: Efficient Market Hypothesis, Modern Portfolio Theory, and 3 Factor Model. You and your advisor should engineer your portfolio to align with these principles. The advisor’s main role is: portfolio engineering based on academic principles, tax efficiency, cost efficiency, simultaneously reducing risk and increasing return; BUT most important is to help clients make decisions and feel confident in their investments so they do not make these 3 costly mistakes and can focus on what is really important in life, family, business, hobbies.
*S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results.