PURSUING A BETTER INVESTMENT EXPERIENCE
Investors are bombarded every day with global events, economic reports, and ‘expert’ opinions and forecasts that make it easy to question a disciplined, long-term investment strategy – even a broken clock is right twice a day.
Here are 10 investment principles that can help you stay on target to achieve long-term wealth in the financial markets.
1. Embrace Market Pricing The market is an effective, information-processing machine. Millions of participants buy and sell securities in the world markets every day, and the real-time information they bring helps set prices.
2. Don’t Try to Outguess the Market The market's pricing power makes it difficult for investors who try to outsmart other participants through stock picking or market timing. As evidence, only 42% of US equity mutual funds have survived and only 19% actually outperformed their benchmarks over the past 15 years.
3. Resist Chasing Past Performance Some investors select mutual funds based on past returns. However, funds that have outperformed in the past do not always persist as winners. Past performance alone provides little insight into a fund’s ability to outperform in the future.
4. Let Markets Work for You The financial markets have rewarded long-term investors. People expect a positive return on the capital they supply, and, historically, the equity and bond markets have provided growth of wealth that has more than offset inflation. 5. Consider the Drivers of Returns Academic research has identified equity dimensions, which point to differences in expected returns. These dimensions are pervasive, persistent, and robust and can be pursued in cost-effective portfolios.
6. Practice Smart Diversification Diversification helps reduce risks that have no expected return, but diversifying within your home market is not enough. Global diversification can broaden your investment universe. Many US investors benchmark to a home market index portfolio like the Standard & Poor’s (S&P) 500, which consists of 1 country and 500 companies. A globally invested portfolio can consist of more than 46 countries and over 8,000 companies. 7. Avoid Market Timing You never know which market segments will outperform from year to year. By holding a globally diversified portfolio, investors are well positioned to capture returns wherever they occur.
8. Manage Your Emotions Many people struggle to separate their emotions from investing. Markets go up and down. Reacting to current market conditions may lead to making poor investment decisions at the worst times. The emotional roller coaster of investing is why many individuals struggle with the disciplined process of rebalancing. A successful long-term, strategic investor is buying when others are fearful and selling when others are elated.
9. Look Beyond the Headlines Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future while others tempt you to chase the latest investment fad. When tested, consider the source. 10. Focus on What You Can Control We create a plan tailored to meet your personal financial needs while helping you focus on actions that add value. Your investment plan is:
- Designed to fit your needs and risk tolerance.
- Structured around the dimensions of returns.
- Diversified broadly.
- Positioned to reduce expenses and turnover.
- Allocated to maximize after-tax returns.
Ignore the “noise” and focus on factors within your control – this will lead you to a better investment experience.