The purpose of having an investment strategy is so you can sleep at night knowing you are doing the best you can and that your money is working hard for you. The best quote I have ever heard on investing is from David Booth, Chairman of DFA, “Markets go up and down. It’s like tides…you’ve got to learn to live with it and accept it. And if you can do that, then you are likely to have a better experience than people that try to fight Markets.” Part of doing this is to understand why you are doing what you are doing.
The reason you need to invest and make your money work for you is because of the devastating effect of inflation. In 1913 $.09 bought a quart of milk, in 1963 $.09 bought 1 small glass of milk and in 2013 $.09 bought 6 tablespoons of milk. Every year a dollar buys less, so your dollars need to grow in order to keep up and enable you to reach your financial goals1 .
The problem most investors are having right now is that they are focusing on things they have no control over and chasing returns. They are focusing on trying to predict what is going to happen next, the best time to get in the market or get out or looking to find the best stock to invest in. The interesting conflict this creates is that academic Nobel prize winning research on this topic shows us this is not the way to have a successful investing experience! 2% of your investment performance comes from market timing and 4% is due to picking the right stocks. 94% of your entire performance is based on diversification and allocation2 . This tells us we don’t need to know what is going to happen next to have a successful investing experience. The real problem is that humans are not wired to be good investors. We are generally not that patient; we are looking for instant gratification and we like to go after things that are new and exciting. The media plays off these emotions to excite us with new ideas or get us scared. And then we get frustrated with what to do next. This tends to lead to unsuccessful investing decisions. If you knew why you were investing the way you are, you would be better equipped to make the best decisions in the face of all the noise.
Here are some tips based on the academic research:
- No one has a crystal ball – predicting what is going to happen next and reacting to that news is not an investment strategy
- Diversify globally
- Eugene Fama won a Nobel prize for “The 3 Factor Model.” This states that small companies outperform large companies, value companies outperform growth companies, and stocks outperform bonds.3
- High grade bonds added to your portfolio reduces risk 3.
- Let the markets work for you, and don’t fight them. Get a Financial Advisor to help you reduce investment mistakes over a lifetime.
1 Source for 1913 and 1963: Historical Statistics of the United States: Colonial Times to 1970/U.S. Dept. of Commerce. Source for 2013: United States Department of Labor, Bureau of Labor Statistics, Economic Statistics, Consumer Price Index-Average Price Data.
2 Sources: Brinson, Hood, Beebower, 1994; Ibbotson & Associates, 2002; Dimensional Fund Advisors, Inc., 2003.
3 All investments and investment strategies contain risk and may lose value.
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Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.
2020-94630 Exp. 02/2022