It’s natural human behavior in times of stress to reevaluate the current situation to find answers. This story rang true for many investors of globally diversified portfolios as the sharp declines of early 2016 caused some to examine their asset allocation and question if they were still making the right decisions. In fact, many investors follow their emotions and struggle to separate those emotions from their investment decisions. Often, following a reactive cycle of excessive optimism and fear leads to poor decisions at the worst times.
Here is a picture of what that emotional investing cycle looks like.
As professional advisors and fiduciaries of the precious resources clients have entrusted us to manage, we have answers that we feel will help our clients and those we care about have a successful investment experience. Here is what we found.
To Have a Successful Investment Experience…
- Embrace Market Pricing
The market is an effective, information-processing machine with millions of participants buying and selling to help set prices.
2. Don’t Try to Outguess the Market
The pricing power of the market makes it difficult for investors who try to outsmart the market through timing or stock picking.
3. Resist Chasing Past Performance
Performance from days gone by provides little insight into an investment’s ability to outperform in the future.
- Let Markets Work for You
The financial markets have rewarded long-term investors. Your best inflation hedge!
- Consider the Drivers of Return
Dimensions of return that are pervasive, persistent, and robust – size, relative price (‘value’), profitability, term, credit
- Practice Smart Diversification
This helps reduce risks that have no expected return to add to your portfolio.
- Avoid Market Timing
Diversify and hold a portfolio of investments that position you to capture returns wherever they occur.
- Manage Your Emotions
(See the cycle above)
- Look Beyond the Headlines
Daily market news can cause even the most seasoned investor to question their discipline. Don’t tempt yourself…consider the source of the news and keep a long-term perspective.
- Focus on What You Can Control
Creating an investment plan fit to you, create a portfolio around the drivers of return, diversify, reduce expenses and turnover, and minimize taxes.