Wednesday, January 6, 2016

Individual Investors ... Don't Do Something ... Just Sit Still and Be Patient ... Now That's Some Much Needed and Hardly Ever Heeded Solid Investing Advice

North Korea is testing hydrogen bombs, oil prices are falling and China's economy is slowing at a greater pace than expected. What's an individual investor to do?

Here's my plan of inaction and advice --- don't do something --- just sit there. That's usually the best and most profitable investment advice for long term oriented savers and investors, and it definitely applies today.

In other words, action resulting in negative results usually arises out of emotional and short term knee jerk reactions to current events. Short term thinking is not the way to achieve investing success over the long haul. Not at all.

Why patience is more important than intelligence offers some solid and profitable advice to individual investors:

"It's easy to make economic and market forecasts; it's just not easy to make accurate ones. Isn't it strange that the people predicting when oil prices will rebound are the same ones who never saw the price collapse coming?

Will we ever see the day when investors receive financial advice based on their needs, goals and time horizon instead of someone's market forecast?

Attempt to get a realistic return

There's nothing in one-, three- or five-year past performance data that will help you invest for the next one, three or five decades. Investment returns are determined primarily by asset allocation and investor behavior. Wise investors know that the key to wealth accumulation is having a long-term view and rarely tinkering with your portfolio.

Trying to beat the market through stock picking and/or market timing is a fool's errand. I understand why amateur investors do this — they think they know more than they do. But why do so many financial advisors act as their enablers? Beating the market has nothing to do with the process of accumulating sufficient assets to allow you to maintain your dignity and independence in retirement. Instead of outperforming the market, your goal should be to have your equity assets yield the market's long-term rate of return.

Financial advisors should eat their own cooking by owning the same assets they recommend to their clients. This way if they do something dumb, they'll suffer along with their clients. Don't hold your breath.

The world isn’t ending

Is it just me or are too many people confusing paranoia for insight? You'll never get rich investing as if the world is about to come to an end. I've read predictions about the imminent end of America my entire adult life. They've all been wrong; which doesn't seem to dissuade today's Chicken Littles. . . .

I'm a fan of global diversification but we often underestimate the risks of investing outside the USA. The fact that many emerging-market countries shun capitalism and free markets, are ruled by communists, tyrants and theocrats; have unstable currencies, limited personal-property rights, restrictions on freedom of expression and religion and non-transparent capital markets is rarely mentioned. . . .

Be careful who you listen to

Don't waste time tuning in to the financial media to see if anything happened today that warrants a change in your portfolio. Financial journalism's daily mission is to explain in bold headlines why the market went up or down. But the global economy is too complex to be broken down into sound bites or 500 word articles. If the market rose today, a piece of good news will be noted. If it fell, some bad news will be noted. No proof will be provided for the supposed cause/effect relationship.

Many investment sales pitches are just wishful thinking supported by faulty analysis. They include some portion of exaggeration, misstatements and dramatization — all designed to elevate the product in the eyes of the investor. . . .

Two sides to the story

Luck is often hidden by a small sample size. That's why speculators attribute their successes to their wisdom and investing skill and attribute their failures to bad luck. . . .

Financial planning is a people business, not a money business. Many investors have been oversold and underserved by Wall Street because most of its representatives have been trained and believe that the opposite is true. . . .

Active investing is a zero-sum game. For every outperforming dollar there is a dollar that underperforms by the same amount. As a group, all investors share the market's return. All assertions to the contrary are pure malarkey.

A vast amount of information is available to investors. Fortunately, you only need to understand a small portion to be a successful investor. Diversify broadly, keep costs low, rebalance periodically and be patient. Patience is more important than smarts — which explains why most investors don't achieve the returns that the market freely offers."

Summing Up

Following The KISS method applies to individual investing success, just as it does to most things.

Stocks outperform other investments over time.

We save and invest for the long term, and the long term arrives sooner rather than we think it will.

Money invested and earning an annualized 7% compound rate of return will double approximately every 10 years, and at 10% every seven years. Let's allow the compounding 'rule of 72' to do the heavy lifting work for us.

Thus, the sooner we start saving and investing, the more 'doubles' we'll realize over time. And those last one or two doubles will be biggies.

Putting our own skin in the game alongside the skin of an experienced individual investor of our choice should generally be our chosen simple and easy path to investing success. And real 'same skinned' experienced, knowledgeable and friendly investors are available who won't charge us much for the ride, since they're going that way anyway.

The less of our own money we pay for the trip and we sooner we begin the journey, the more we'll have left for ourselves and our loved ones to enjoy down the road.

So why do so many people make something that can and should be so simple and easy, so complicated and hard? That's a big mistake that far too many people needlessly make.

And that's my take.

Thanks. Bob.

No comments:

Post a Comment