Do you want to know the biggest secret on Wall Street? Here, come a bit closer. It’s that investing is not complicated, it’s just made out to be complicated. The truth is that billions of dollars are pumped through a system with a layer of fees feeds and infrastructure that keeps CNBC, Bloomberg, Hedge funds, Goldman Sachs, JP Morgan and all the people who work there in business. All with the hope they have the secret sauce: the ability to earn greater returns than the market average or protect your investments from a loss when the market declines.
Sure flashy movies like The Wolf of Wall Street may get some fired up about actively managed funds, slick sales tactics, and ‘genius’ investors, but the reality is when it comes to building an investment strategy to secure your goals none of that is necessary.
In fact, some of it can be downright counterproductive for you and your financial goals.
Investing, weathermen, and Vegas
You know what investment managers, weathermen, and poker players all have in common? People think they’re good at what they do and better than you or I could do when really they’re all at the mercy of luck. You only hear about the five-star mutual fund, the hedge fund that made it big, and the only poker player who makes the news is the one with the right hand. The truth is none of us can see five seconds into the future, so how could you possibly trust the prediction that six months to a year from now, some specific investment strategy will come to fruition.
Sure there are mathematical formulas, and savants behind them, however, if it were to rain one day versus the next, a war breaks out unexpectedly, or a new fad comes on the scene every single model, no matter how well thought out, could crumble into dust. In fact the more complex the model, the more that could go wrong through predictions off by leaps and bounds. Burton Malkiel, author of A Random Walk Down Wall Street has a pithy way of saying it.
A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.
When it comes to most actively managed funds, the only difference between Wall Street and Vegas is one is considered smart and the other a waste of money. The concept is the same though, you cannot predict the future or the market, however, there is no cause for fear. Even with market crashes and recessions the stock market does consistently appreciate in value and will continue to do so as economies grow, and shares trade hands.
Don’t beat the market, join the market
It’s impossible to beat the market year over year and consistently find the next Bitcoin from last year. You may get lucky time from time but generating consistent results is statistically impossible. That said, as the chart above clearly shows, over time the market has and will increase in value providing you another option. If you cannot beat the market, simply buy the market.
Rather than search for that needle in a haystack, you can just buy the entire haystack, or better yet create a portfolio full of haystacks. Sure you’ll get a wide range of mid-performing stocks, a mixture of bonds and low-risk securities, and maybe even a few ringers thrown in to lead the pack. What you won’t have though is a catastrophic loss chasing the ‘next big thing’ because you got on the ride too late and absorbed the downside.
Historically the stock market grows year over year and even after recession and war it continues to reach new peaks as time marches on. Don’t invest in one ringer that everyone tells you to buy, join the market as a whole and watch your portfolio grow over the long haul with the economy. As always it’s important to not get greedy or nervous; set your goals, set your strategy, and let the ride run its course. It’s about planning and securing your future, after all, not throwing money into the system hoping to strike it rich.
Buying across the market drastically reduces risk, as you average the returns on dozens, hundreds, maybe thousands of securities into one chunk that you own absorbing the shock if one stock or sector had a down year while riding the high of the economy. The evolution of low-cost index funds and ETF’s (exchange-traded funds) provide investors with a low-cost way to participate in the stock market.
There are further steps you can take while using a broad approach to investing. For example, do you want to invest in mid, large, or small-cap stocks? How about hold a heavier weight in a certain sector (betting that this sector will outperform the market as a whole). However International vs US stocks? Or using Bonds to provide a hedge against risk and ensure a stable return (while also betting you won’t miss out on a lower interest rate in the future). While monumentally safer than picking stocks individually there are asset classes that can swing a bit more widely in price, so understanding where your money is going is crucial to hitting your longterm goals.
Chart from Seeking Alpha
Investing with broad strokes doesn’t have to be without choice. You can take on higher risk, while in a generally ‘safer’ position than an actively managed fund. Now it’s just a matter of matching your risk tolerance with your goal strategy.
The next step is actually understanding what your goals are.
Are you 25 years old, living with roommates, and just starting to save for your retirement fund? Or are you 60 years old with two houses, your children out of school while you wrap up your career and prepare for life after work?
Two very different stages of life will present two very different goals and investing strategies. The first step is creating a plan for your money, what are your goals for your investments, how long until you will need to take the money out. So Planning should drive investment management. With proper planning and an understanding of your goals, you can hit your financial marks, no matter what happens in the moment when it comes to your portfolio.
At M3 Wealth Advisors, we have your best interests in mind. That means helping you make suitable choices to help you save for and manage your future wealth. Sure chasing the hot new stock or the booming sector seems attractive at first glance. The problem is that you’ll never be able to accurately predict when the lights will go on and the music stops. So why worry about the future, ride the wave of the market as the economy continues to grow, understand your risk, and manage it effectively.
Take the first step and find your risk profile and get the mathematical read on your ability to emotionally handle the ups and downs of the stock market. Once you know where you stand, you’ll know how to invest in a way that hits your goals while saving yourself from sleepless nights.