Wednesday, February 27, 2013

Stock Market on a Roll ... Two Important Things to Keep Top of Mind

The stock market is on a tear so far this year. It's up more than 100 points again today.

My own swag is that it will reach an all time high sometime later in 2013. Of course, it may fall before then, and it may not reach a new high until next year or even later. But to the long term investor, that's not all that important.

As the saying goes, the only two prices that matter are what the buy price is and what the sell price is. All the rest is noise. Unsettling noise perhaps, but nevertheless just noise.

Of course, my crystal ball predicts that a Dow 30,000 is in the cards during the next ten to fifteen years as well. That said, prices will undoubtedly drop precipitously from time to time. Nothing goes straight up.

And to realize that 30,000 target, we really need to be concerned about just two people, one of whom is unnecessary --- ourself and our paid financial adviser.

Along those lines, Two easy ways to lose big in 2103 contains solid investment advice well worth heeding:

"The stock market has been kind to investors lately, and despite the failures of our government, optimism is stronger than pessimism. Here's a warning to investors: Look out!

Despite the generally cheerful tone in the media and on Wall Street, thousands of investors will lose their shirts this year. . . .

There are lots of ways this could happen, but today I'm going to focus on two. . . .

Perhaps the most common way investors get into deep trouble is by trying to beat the market. The cruel truth is that such attempts rarely succeed except by accident (which is another way of saying luck). And yet the very attempt to beat the market turns would-be winners into real-life losers.

In my 2011 book, Financial Fitness Forever, I devoted a whole chapter to the perils of beating the market. Here are five:

1 - When you try to beat the market, you're bound to focus on performance, especially short-term performance. You're in a race to win, and (just like any good sports fan) you want to know the score, and you want to know it now. What you want emotionally is a good score now; but what you really need as a long-term investor is a good score some decades from now. . .

2 - When you focus on performance, you are likely to ignore the most powerful factors that build favorable long-term results: Expense control, tax efficiency, diversification and risk control (to name only four).

3 - When you're hellbent on beating the market, you are likely to latch onto dreams of “a new era” that supposedly will bring wealth to people who get in on the ground floor. Remember the dot-com investment boom of the late 1990s? Successful investing almost never depends on new-era fantasies.

4 - Logically, beating the market is a terrible goal. If you make 20% in a year in which the Standard & Poor's 500 Index goes up 30%, you have to consider yourself a failure. If you lose “only” 40% of your retirement nest egg in a year when the index loses 50%, you have to be willing to congratulate yourself for successfully beating the market. (Will your spouse or partner see it that way?)

5 - Your quest to beat the market is likely to lead to emotion-based buying and selling decisions. You'll follow the herd, buying high and selling low, exactly the opposite of what successful investors should do.

And what's so bad about following the crowd? The majority of mutual funds fail to beat the market. . . .

Don’t be a pawn

Finally, trying to beat the market makes you a pawn of Wall Street. That leads me to my second point.

In the next 10 months, lots of investors will lose lots of money because they have bad financial advisers or follow false gurus. The investment industry always has something up its sleeve to entice investors and separate them from their money. It may be initial stock offerings. It may be gold or some other commodity. It may be a high-paying “safe” substitute for bonds.

Despite the hope and hype, in the sales-driven culture of Wall Street, “the house” always wins, and the investor sometimes wins. This is summed up in a familiar adage: “The broker makes money, the firm makes money and the client…well, two out of three isn't bad!". . .

If your goal for 2013 is to lose money, I've just shown you two easy ways to do so."

Summing Up

He's right, of course.

Taking what the market gives us and not giving brokers a chunk of those rewards is the best individual investing advice to follow.

Let the market do the work for you.

Be a lazy investor that owns shares of solid companies that pay growing cash dividends over time.

It may be boring, but what's wrong with that?

Thanks. Bob.

No comments:

Post a Comment