One of my New Year’s resolutions is to help investors have behavior that helps them achieve their goals. Central to intelligent investor behavior is understanding when to say “I don’t know.”
The correct answer to any of the below questions is “I don’t know”:
- Where is the stock market headed this year?
- Will interest rates go higher this year?
- What sectors will perform the best?
- Which is better this year, U.S. stock or international stocks?
Once an investor accepts that much about investment returns in the short-term (such as a year) is not knowable, one can then concentrate on good, intelligent investing behavior for the long-term. After all, it is the long-term goals (example: retirement, college savings, etc.) that investment returns should help to fund.
Since the investor does not know what the bond or stock market will do in any year, the following becomes the best course of action:
- Have cash liquidity for emergencies and several months of spending, to avoid being forced to sell in a significant downturn. When a large cash outlay is seen in the future, create the cash well in advance of the spending need.
- Be fully invested. Do not create cash in anticipation of near-term market downturn and do not increase investments in anticipation of near-term market gains.
- Diversify, diversify, diversify. Own both U.S. and foreign markets in stocks and bonds all in targeted portfolio percentages. Rebalance back to the targets on periodic basis.
- Make index funds the core of your portfolio. These track markets in low-cost and tax-efficient fashion.
To do all of this, an investor will have to learn to ignore many voices who speak differently. One should ignore those voices because they are self-serving. Here are examples of what an investor should ignore:
- CNBC, Bloomberg and other financial “news”. This is entertainment television created to attract eyeballs that are then sold by advertisers. Particularly harmful to true investors are so called “experts” like Jim Cramer.
- Brokerage firms who tout funds with great track records. They just want to sell that which has been in favor lately—easy to sell but often not what an intelligent investor needs. This runs counter to diversify and rebalance. How on earth can they know if their advertised fund will fit into your overall portfolio plan?
- Money managers who claim to be able to “beat” the market. Is that “beat” after their fees and income taxes? There are many good studies that show how rare it is for funds to beat their benchmark index (before income taxes). One example is the SPIVA report (Standard and Poor’s Index Versus Active).
In summary, intelligent investor behavior is essential to achieving your life goals. That intelligent behavior starts with accepting what you don’t know (and understanding others don’t either, regardless of what they may say).
To speak about your personal situation you may contact me directly at 812-602-6301 or via email at firstname.lastname@example.org. Alternatively you may just wish to visit our website at www.paynewealthpartners.com.
Date Published: January 18, 2017
Authored By: T. Taylor Payne
Phone: (812) 603-6301