Seeking A Better Investment Experience

by: Mark Hebner


Capturing the market in a low-cost index fund is more likely to be a winning proposition for investors.

Chasing performance is a recipe for disaster; the top performance you observe is usually the result of luck, not skill.

Partnering with an advisor is ultimately an insurance policy against yourself.

The wide world of investing is complex. For most of us, it's a vague concept that is seemingly associated with the uber-wealthy like Warren Buffett. We all understand the concept of having our money grow for future financial goals like retirement, but connecting the dots from earning a paycheck to having a secure financial future often seems convoluted.

Seeking help from a financial professional is equally as opaque. Horror stories about financial fraud or deception have become all too apparent, and while the vast majority of financial professionals are in it for the right reasons, we do not know whom to trust.

To compound the situation, a constant barrage of media frenzy has taken a historically disciplined process and turned it into a casino, enticing investors to get rich quick. False promises, misinformation, and conflicts of interest have only left an overwhelmingly percentage of the population underfunded for their retirement.

So how do we fix it?

As the well known folk saying goes, "Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime." Likewise, educating the masses on how to invest versus simply telling them what to do is our answer to solving the problem.

Following the simple steps presented below will help to connect the dots of the investment process and ultimately lead to a better investment experience.

1: Embrace Market Pricing

The market is a very powerful entity. It takes the information held by millions of market participants around the world and conveys the combined knowledge into a single piece of information: the price. The price is in fact more than just a number. It represents the millions of estimates made about the value of a company into a single and continuously updated figure.

2: Work With the Market Not Against It

While the financial media may highlight the performance of any one manager as being stellar by picking the right stocks or correctly timing when to get in or when to get out, more often than not professional money managers fail to outperform their respective benchmark over long periods of time. Thus, capturing the market in a low-cost index fund is more likely to be a winning proposition for investors. As of the end of 2015, only 17% of U.S. equity mutual funds survived and outperformed their respective benchmark for 15 years.

3: Chasing Past Performance is a Recipe for Disaster

Rating companies like Morningstar and Lipper will provide an annual scorecard of mutual funds, rating them in terms of performance. Unfortunately, this information is completely unreliable as an indicator for a future investment strategy. Why? Most short-term outperformance is random luck versus an act of skill.

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4: Markets Reward Investors in the Long-Run

The history of the capital markets has been shown to reward investors with a long-run mindset. Although there are certain periods of extreme volatility, the market is a long-term ally for the investor who rides them out. Because investors always require a positive return on the capital they supply, the pricing mechanism inherent in the stock market will always ensure that investors are expected to earn a positive return. For stocks, the historical return has been close to 10% over the last 88 years.

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5: Learn to Speak "Riskese"

Decades of academic research have identified certain risk factors in stocks and bonds that have compensated investors over long periods of time. These risk factors have identified differences in expected return between different groups of stocks and bonds. Building a portfolio that focuses on exposure to these factors will give you the highest expected return for the amount of risk taken.

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6: Don't Put All of Your Eggs In One Basket

As Nobel Laureate Merton Miller said, "Diversification is your buddy." Index funds now give investors access to a globally diversified portfolio of over 12,000 individual companies, increasing the reliability of capturing the benefits provided by capitalism around the world.

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7: Timing the Market is a Fool's Errand

Because nobody can accurately predict what is going to happen in the future, it is best not to try and figure out when is a good time to be in and out of the market or certain market segments. Being globally diversified means you always get to own the winner.

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8: Partner with an Wealth Advisor

The biggest value of working with an advisor is having someone to help control your emotions. Let's face it, when times are turbulent our emotions will often trump our logic, leading to devastating financial decisions. Having someone there when times get tough is ultimately an insurance policy against yourself.

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9: Avoid the Siren Songs of the Financial Media

The media is in the business of selling stories, not investment advice. Stories are meant to be exciting. In contrast, as Nobel Laureate Paul Samuelson always said, "investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." Like Ulysses in the epic poem The Odyssey, avoid the siren songs enticing you to actively invest and tie yourself to the mast of a long-term investment plan.

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10: Invest and Relax

Once you have worked with a wealth advisor to establish a long-term investment policy statement based on your individual capacity to take risk, relax.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.