Last column, we explored 10 observations regarding investing. This time we examine additional thoughts that might help you walk through today's uncertainty.
11. Someone or some group of people might do better than you. This is easy to understand. Anyone who researches past performance can find an index, mutual fund or individual investment that did better than what they owned. It is virtually impossible to be the best, but human nature strives for perfection. It is important to make it clear that there will be someone or some stock that performs better.
12. Someone or some group of people could do as well as you with less risk. This is particularly true when the equity market has a bad year or years. It sounds similar to No. 11, but there is an important distinction. Money market investors and bondholders may be able to say that they did as well as the stock market, even though they took a lot less risk. The common line you will here is: "I could have been in CDs, money markets or bonds and done as well - or better than the stock market." Hindsight sometimes can look pretty good.
13. Yours is the only relevant time frame, not other investors'. Hypothetical mountain charts plotting past performance, for example, are irrelevant to your performance. Many investors are presented with hypothetical performance numbers. Based on past performance, these numbers are assembled into a graphic illustrating what might have happened had funds been invested for some standard period. A mountain chart, for example, might demonstrate the way a dollar figure invested in a mutual fund over the past 65 years could have turned into an amazing end value. The only way most people could obtain these hypothetical results would be if they had invested $10,000 20 years before they were born and paid no taxes since inception.
14. The investment market is a rapidly adjusting environment where past performance is an extremely poor predictor of future success. Investors often become preoccupied with past numbers because they are readily available and easy to understand. In response, people in the investment world say, "Past performance is no indication of future success." This is not just a cute phrase designed to protect them from lawsuits; if past performance were a successful predictor, anyone able to read easily could achieve investment success. There are countless examples of highly positive one-year track records followed by significant under-performance.
15. You are not paying for information but for knowledge. People like to think that they know something others do not, especially when it comes to investments. This is rarer than ever. The Information Age has made information readily available to a large number of people simultaneously. This means that you are not paying for information but for the reason and knowledge that an advisor applies to that information. This does not mean that all information is meaningless but the price of securities will most likely already be reflective of available information.
16. Money can only made in the future; it is impossible to buy past returns. As obvious as this is, it is worth repeating.
17. The principal cause of change in investment prices is change in consensus expectation. Most investors do not have a clear understanding of what causes security prices to move. If all investors agree upon a growth rate for a company and the company meets its expectations, the price of the company generally will not change. Prices usually change when unexpected information surfaces or when something comes out that the consensus was not considering, such as surprising company earnings reports. This is called a catalyst for change. Still, it is important to note that current market conditions do not necessarily reflect this. Prices right now do not always follow this rule.
18. Get used to uncertainty. Like it or not, almost every investment decision is based on multiple guesses about the future. Advisors make educated guesses about the future. Decisions they make involve concrete details and some guessing. Deciding to fund an IRA for the next 10 or more years versus investing outside the tax-deferred vehicle, for example, entails making some guesses about the expected long-term return of the assets you will own, the stability of the current taxation laws and the assumption and probability of future tax rates for IRA distributions.
19. Increasing your odds doesn't always mean 100-percent success. Investors must realize that there is something random to investment success. Even the application of knowledge and sound forecasting may not work. A financial advisor might help increase the probability that you will reach the goals you formulated together at the start of your relationship.
This column is for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
James D. Hallett, investment advisor representative, offers advisory services through Hallett & Associates, P.S., a registered investment advisor.
Registered representative, securities offered through Cambridge Investment Research, a broker/dealer (Member FINRA/SiPC). Cambridge and Hallett & Associates, P.S., are not affiliated.
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