In the past 15 years, the stock market has crashed over 50% twice. We have witnessed housing bubbles, technology bubbles, biotechnology bubbles, and we could be in the middle of a bond bubble. Everyone has an opinion on what will happen next. There is so much noise in the markets that it is hard to know when to buy or sell. I won’t pretend to give you my latest market forecast but I can help you avoid potential investment pitfalls. Below are 10 facts that I have learned through experience over the course of my 17 year investment career that could help improve your returns. Many may view these facts as just my opinion but I feel confident that I could easily win the debate on each of them.
Fact #1 – The more you buy and sell stocks, the worse off you will do
Investment advice – Online trading companies glamorize wealth created through stock picking. The more you trade, the more money they earn off you. Limit the trading of individual securities and stay diversified. If you really like a stock in a particular sector, then look at the corresponding exchange-traded fund (ETF) in that sector. By staying diversified, you will limit the chances of a significant overnight price drop.
Fact #2 – Beware presentations based on historical performance and hypothetical analysis
Investment advice – If a wealth advisor or financial planner shows you a hypothetical analysis of investment performance of their model or allocation return, please keep in mind that it will be impossible to replicate those returns. If they show you a portfolio that earned 3,000%, I’d be happy to create a back-tested model for you up 4,000%.
Fact #3 – Selling is not an investment strategy
Investment advice – There are many wealth advisors who describe their investment process as knowing when to sell and they say that they can get you out of markets before a crash. These same advisors that “save” money on the downside will also most likely miss any potential market upside. The reality is that t’s easy to sell, but it’s hard to know when to buy back in.
Fact #4 – Technical Analysis does not work
Investment advice – Charts are a by-product of where a stock or index has traded in the past. They do not tell the future. If an advisor recommends a stock or index by looking at historical charts, in my opinion, they are just guessing. Turn the chart upside down and ask them what they think.
Fact #5 – Market timing is not a successful strategy
Investment advice – In my entire 17 year investment career working alongside the smartest investors in the world, there has not been one investor who tried to beat the market through market timing. The portfolio managers that I have worked with, all had the best access to information and understood that market timing was a losers game. Professional investors do not time the market nor should you.
Fact #6 – Concentrated portfolios will eventually blow-up
Investment advice – If you have a concentrated portfolio between 10-20 stocks, the odds are your portfolio will blow-up or underperform. Unless you own Berkshire Hathaway or other mega-cap stocks, you are asking for trouble. In most cases, you can generate the same returns with much less risk.
Fact #7 – Markets are inefficient and active managers can beat the market
Investment advice – The marketing effort of many of the companies that sell Exchange-Traded Funds (ETFs) have painted the picture that active portfolio managers underperform the market. Investing is similar to the PGA tour. There are a limited number of investors who do beat the market every year similar to PGA golfers who can consistently score under par. You will normally have to pay extra to invest with them.
Fact #8 – Individual stock picks are destined to blow up
Investment advice – I have never made money on a stock pick and I doubt you will consistently. I have listened to 1000’s of stock picks and it would be a coin flip on the ones that hit. Be very careful if you are investing real money into a recommendation from a friend.
Fact #9 – Asset allocation and diversification are ways to successfully build wealth over time
Investment advice – I believe that a diversified portfolio is the best way to achieve financial success. While asset allocation will not make you a millionaire overnight, it will help you lower your risk and increase your returns over the long-term in your portfolio. You will lower trading costs, increase tax efficiency, and become a better investor in the process.
Fact #10 – Working with a financial advisor can increase your returns
Investment advice – While selecting an advisor is based on personal preference, I believe that if you partner with an advisor that has over 10 years investment experience and knows how to integrate investing with financial planning, then you will be able to achieve financial confidence. Even legendary investor Warren Buffett does not invest alone. He has stated many times on record how working with Charlie Munger has been one of the key reasons to his investment success.
You have worked hard to earn your money. Do not fall for the 10 pitfalls that plague many other investors. Choose a financial advisor that can help you invest for the long-term and who understands asset allocation. If you would like to learn more on how I can help give you financial confidence or if you have any questions, feel free to give me a call at 508-207-8049 or send me an email to firstname.lastname@example.org.
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Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.