Well, I now have over twenty years of learning as an investment advisor, so…it is time to pause and take stock. Learning is often a bit painful in this business as you can’t take decisions back and ask for a do over. As things change and I learn more, there are some simple truths that I feel are well to keep in mind. So, here are a few things that I believe are helpful in sifting through the noise that exists in mind boggling amounts, as we are overwhelmed with financial advice.
Don’t get caught up in worrying. Markets go up more than they go down. However, they go down periodically and you should expect a fall of as much as 10-20 per cent to be a normal, recurring event. We are very spoiled by the period that began in 2009 and must expect more normal volatility going forward. A market correction is not a call for abandoning ship.
In a good market, an inexpensive index investment will usually win. There are an awful lot of very smart folks in investment management, but they will not often beat an investment that tracks an index during a good market. They will all point out their superior skills and a time period they have “beaten the market” but….don’t chase these guys down an alley as bad things can happen in an alley.
In a bad market, you need a manager to limit your losses. Sticking with an index only strategy in a bear market is a terrible idea. You hire a good manager primarily to manage your risk and it is during a bad market that good managers finally earn their keep. If you want some defensive players to protect your capital, you must have some active management.
You can’t know if we are in for a good or bad market, so… a combination of passive index funds (for good markets) and skilled active fund managers (to limit risk in bad markets) is the prudent answer for the long haul.
The experts and pundits should be largely ignored. These people exist as entertainers, not helpers. Think of them as noisemakers rather than prophets. As entertainers, they are paid to pretend to be much smarter than they actually are. Unless they have skin in the game (i.e. suffer a loss if they are wrong), they should be given a very low weight in your deliberations.
Emotions can be valuable or misleading in investments. You should generally go with your gut, but be aware that people are trying to manipulate your feelings by appealing to either your fear or your greed. If you let them manipulate your feelings, you may suffer emotionally and financially.
By Ted Schwartz, CFP®