The most important things in our lives are our families and our health; however, in a close third comes the wealth that we have painstakingly saved to provide our children a good education, our family a safe home, vacations, boats, and the other benefits of financial security. However, most of us have not received any formal education on how to manage this very important aspect of our lives, especially investing and financial planning. As a result, individuals turn to the financial media and the "Market Gurus" to gain the education they think will lead them to the financial freedom we all strive to achieve.
Wall Street and the financial media want us to believe we can win by playing this active game of investing by listening to the "hot" news, the stock picks and the economic forecasts that will lead us to an early retirement by "beating the market" with their advice just so we "tune in" to their programs. In the end, there are significant conflicts with this education and if the majority of investors understood the true benefits of a buy-and-hold strategy, some of the thousands of trades placed each day would likely not be made. Likewise, some of the products that thrive on being complex would see a not-surprising decline in popularity if investors knew about their many disadvantages.
It is extremely important to be aware of the academic research demonstrating that markets are generally highly efficient and it is highly unlikely investors will be able to "beat the market" either in terms of selecting individual securities or moving between asset classes. In the long run, we expect that equity markets will rise more than fall and individuals who correctly predict short-term market movements should likely attribute their results to luck rather than skill
It is essential to know how a well-diversified portfolio can help manage risk, a message that often requires repeating as asset classes come in and out of favor over time. Global diversification across a variety of imperfectly correlated asset classes is the most effective way to reduce risk. Diversification is always working, whether we’re pleased with the immediate results or not, it is fundamental for long term investment success.
Emotions can also lead investors to make poor decisions at the wrong times. It is easy to remain disciplined during bull markets. However, it is far more important to do so in bear markets to avoid the typical inclination to sell at market bottoms. Thus, the role that emotion plays in the success of an investment strategy cannot be overemphasized. Education is key to ignoring one’s emotional reactions and staying the course.
Wherever you acquire your investment education, prudent investors will continue to evaluate their risk tolerance, build globally diversified portfolios and adhere to their well developed investment plan based on long-term financial objectives. Not allowing the "made for TV" investment advice influence our financial decisions is crucial to remaining disciplined when our emotions want us to travel off course. Having such knowledge changes the way you approach investing because poor financial decisions could negatively affect the most important things in our lives, our families.
Sam Varano works with WebsterRogers Financial in Charleston. Please contact Sam at firstname.lastname@example.org or (843) 576-2763.