Have you ever embarked on any kind of improvement project? You are confident you can complete the task, but you are unfamiliar with the details.
If any of you are like me, a “how to” clip is usually available on YouTube, but I’ve noticed there isn’t a practical way to reach out with follow-up questions.
For example, I recently did an outdoor home improvement project this past spring. It wasn’t too difficult, but I needed expertise to help with some decisions I was facing. In my case, that is where my local home improvement store came into play.
I have usually had good luck with Lowes. The employees not only know their craft exceedingly well but are excited to share their ideas. You can see it in their body language and the sparkle in their eyes when they explain the nuances of a project. Plus, they are happy to share any problems you might encounter and how to sidestep pitfalls.
They are, in one word, educators.
What they have taught me and what I’ve learned through various projects in life is a fairly simple concept: “Experience isn’t the best teacher–someone else’s experience is.”
I have many goals that I want to accomplish with you. When I ponder the fact that you have entrusted me with your finances, your financial goals, and your dreams; it is truly humbling.
Of course, I understand that there are differences between a financial plan and a home improvement project. But I draw up the analogy because they have one commonality–they are linked by the educational component.
Just like the friendly individual at the home improvement center, who thrives on his/her customer’s understanding of a project, I experience the same thrill when you begin to grasp the basic skills that make for a successful investor.
This month, my goal is to share with you some of the basic building blocks that will put you on the path to becoming a lifelong student of investing. Even the best of the best never stop learning.
In fact, being a lifelong student might just be the first principle of becoming a great investor.
So, let’s get started.
1. Create a long-term plan and follow that plan
“A plan is a bridge to your dreams. Your job is to make the plan or bridge real, so that your dreams will become real. If all you do is stand on the side of the bank and dream of the other side, your dreams will forever be just dreams. First make your plans real and then your dreams will come true.”
—Robert Kiyosaki, the author of Rich Dad Poor Dad
Agreed, but I take exception with one part of the quote. It’s not your job to make the plan real. With your input, that’s my job!
If we were to go back 50 or 60 years, the choice of investment vehicles was limited. Back then your likely chose between stocks, bonds, mutual funds and cash. Still, how might you create the proper balance between these choices?
Today, there has been an explosion of investment vehicles. It provides us with choices, but choices create complexity and even confusion for all but the most experienced investors.
We have assisted many of you in developing a long-term financial plan that’s designed with your financial goals in mind.
Great investors have a financial plan.
It becomes our guide. It is a financial roadmap that puts you on the best path to your financial destination.
It is the bridge to your dreams.
2. Learn to control your emotions
Successful investors learn how to control their emotions.
Most of us remember Mr. Spock from the original Star Trek series. He was half human and half Vulcan. His Vulcan half made him the epitome of rational thought, and he rejected emotional responses. I get that he was a fictional character, but none of us can match Mr. Spock’s steely devotion to logic.
However, we don’t need to be as stoic Mr. Spock if we have a well-thought-out financial plan. The plan is grounded in empirical research. It provides us with boundaries, but most importantly, it keeps us on track when storm clouds gather.
We recognize the plans we recommend are not bulletproof, but we are confident they put people on the best long-term path for reaching their goals.
I also know that when volatility strikes, some folks take it in stride while others want to take a detour from the plan. They are tempted to react emotionally. I get it, I really do. After all, we are not Mr. Spock and therefore, our tendencies are to feel before we think.
While heading to the safety of cash may feel good in the short term, I’ve seen the anguish of those who have opted for the sidelines near a market bottom and then watch in dismay as shares began to climb. Remember, longer term, markets rise in most years.
- Recall 2008. According to a Fidelity study, “401k Investors who stayed in the markets saw their account balances—which reflected the impact of their investment choices and contributions—grow 147%” between Q4 2008 and the end of 2015.
- Don't try to time the market. Trying to move in and out of the market can hurt an investor's long-term retirement savings. Fidelity examined 401(k) investor behavior between 2008 and 2015, and compared people who continued to invest in equities during this period with those who dropped to zero percent equity in their 401(k). Assuming the investors started with a balance of $10,000, the analysis showed that investors who went to zero equities saw their 401(k) balances grow by 74 percent to $17,360, while those who kept a portion of stocks in their 401(k) saw their balance grow almost 150 percent to $24,800.
“That's twice the average 74% return for those who moved out of stocks and into cash during the fourth quarter of 2008 or first quarter of 2009.” Stocks bottomed in early March.
Even worse, over 25% who sold out of stocks during that downturn never got back into the market.
The opposite is true, too. Don’t become overconfident when stocks are surging. Some folks begin to feel invincible and are tempted to take on too much risk. It gets them into trouble, too.
Sticking with the plan helps to avoid mistakes that can be costly in the long run. If you feel too much distress during times of volatility, let’s talk and see if your tolerance for risk has changed.
3. Become disciplined and be patient
Like the control over emotions, a financial plan helps to enforce discipline. By design, the plan puts you on a gradual path to wealth accumulation, which encourages patience. There are no shortcuts.
We are open to innovation and empirically verified research, but I would caution you to be very careful about what I call the “flavor of the month.”
Remember the dot-com boom? Like shooting stars, fast-growing companies soared into view for a brief period before fading into obscurity.
The legendary investor Warren Buffett sticks to what he knows best and invests over a very long-time horizon. His disciplined approach and his patience have brought him rich rewards.
4. You must diversify
Allow me to illustrate our view on diversification. Take a look at the two pictures below. I ask you, what do they look like to you?
The most common answer I hear from our clients is a birthday cake, which makes perfect sense. However, imagine that instead of a birthday cake, you are looking at two different elevators. Now imagine yourself riding in either of these elevators during an earthquake. I ask you, which elevator would you want to be in and why?
Here’s the principle I want you to live by: a one-investment theme portfolio is like a one-cable elevator. Both are too risky to ride.
Key Point: Diversifying among stocks, bonds, cash, real estate, and commodities doesn’t guarantee there won’t be short-term losses, but it greatly reduces risks and allows you to participate in investments that are rooted across the U.S. and global economy.
5. Never lose a healthy level of skepticism
A good investor asks questions. Following simple but time-tested principles can prevent fraud.
Be wary of investments that promise riches or offer returns that are too good to be true. Today, a con artist won’t use the phrase “get rich quick.”
But you will see ads that hype strategies that have quickly turned a meager sum of cash into a big pile of wealth. Such claims should be viewed with a healthy level of suspicion. If these strategies worked, wouldn’t high-powered institutional investors implement them? They don’t.
If you come across such a tempting scheme, please ask me to review it. I promise to offer you an objective analysis. I’ll point out advantages, if any.
More importantly, I’ll counsel you on the questions you need to pose to those who are asking for your trust. I can’t begin to tell you how much it pains me when I see someone get scammed.
Let me sum this up by getting back to what is the foundation, or the cornerstone, of becoming a skilled investor. I mentioned it just as we began. Become a lifelong student. Never stop learning and immerse yourself in the principles I have shared.
Table 1: Key Index Returns
Dow Jones Industrial Average
S&P 500 Index
Russell 2000 Index
MSCI World ex-USA**
MSCI Emerging Markets**
Bloomberg Barclays US
Aggregate Bond TR
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: Jun 29, 2018-Jul 31, 2018
YTD returns: Dec 29, 2017-Jul 31, 2018
**in US dollars
If you need assistance on any of the points, or would like to discuss any other matters, we are happy to be of service.
Phil E. Gose
Portions of this article were created with the assistance of Horsesmouth, LLC
The views expressed are not necessarily the opinion of FSC Securities Corporation, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Individual circumstances vary. Investing is subject to risks including loss of principal invested. No strategy can assure a profit against loss. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.