If you have met with a financial advisor from one of the big Wall Street firms in the last few years, you might have walked away with a binder full of charts, hypotheses, forecasts, back-testing, and God only knows what else.
What is the purpose of all of this? Do they expect you to go home and review this and come back with questions?
The purpose, in my opinion, is to overwhelm you. It seems as if they want you to feel financially ignorant and for you to blindly trust that you will never understand how this works because it is so complicated and intricate — thank the Lord you found them and they can take care of you for a small fee of 1.50%!
Does investing need to be this complicated? Does it really take a 100-plus-page binder for families to do sound investing, or is this just a sales tactic?
In my years as a financial professional, I have found there are three simple rules to investing:
1) Define Your Limits
A big portion of investing is about how much risk, or volatility, you want in your portfolio.
Can you stomach or can you financially withstand significant changes in value if the market declines like it did in 2008? Did you sell your equities when the market dropped? If you did, you were part of a great wealth transfer to the people who had properly defined their risk limits. The sellers are the only people who lost money back then. Those who had properly built their portfolio based on their risk tolerance have more than doubled their money from the pre-crash numbers.
Investing should not be emotional, but to pretend that your emotions have no effect on your investing is crazy! We are naturally prone to run to safety or things that are better performing. Sit down and define what it is you want out of your investments and how much risk you’re willing/able to take with your financial situation.
Realize someone is always going to be having a banner year — don’t get greedy! If you don’t have a way to measure risk in your portfolio, find someone who can help you.
To build an efficient portfolio, you will need to diversify your assets. At any point in time, the market is properly priced based on all known information; trying to pick the winners and losers is a fool’s game.
What is great today might be fodder tomorrow. Had you told someone in the ’90s that Sears and Toys R Us would be out of business in a few years, they would have laughed at you.
If the boards of these two giants didn’t know what was in store, how are you and I supposed to know? Don’t put all your financial eggs in one basket. The market will give you plenty of returns to work toward your financial goals. The important thing is that you properly diversify and manage risk. There is no need to get greedy and try to beat the market.
Rebalancing is putting the theory of “buy low, sell high” into action. We have all heard of this strategy and everyone you talk to says they are doing it, but the majority are fibbing. Why? Again, it is our natural instinct to run to what is working or to pleasure more than to pain or what is not performing. I use this tactic with my clients on a daily basis. Let me give you an example.
In 2008, government long-term bonds returned 25.80%, while U.S. small stocks lost 38.67%. If we were rebalancing correctly, what would we do? We would sell off the gains from the bonds and buy U.S. small stocks. What do you think most people left to their own accord did? They sold these terrible, underperforming U.S. small stocks and couldn’t believe they ever bought them and moved their funds to long-term government Bonds. Fast forward 12 months, government bonds are down 14.90% and U.S. small is up over 47%.
Clients not only lost the earnings they had just gotten but they lost even more of their money because they didn’t have anything invested in U.S. small stocks anymore. It’s why many investors underperform the market benchmarks by over 40%.
Rebalancing is the toughest thing for investors to continually do correctly. It is easy to build a diversified portfolio on Day One, but it can be difficult to keep it there as returns and life start happening.
Understanding investing does not need to be complicated. It doesn’t take a 100-page binder for you to make money in markets and work toward your financial goals. Implementation can sometimes be difficult and staying the course has its challenges, but don’t let anyone ever convince you that you shouldn’t fully understand what is happening with your investments and your money.
Working with an independent financial advisor can help you begin to understand where your portfolio stands and what moves need to be taken to work toward your personal needs and goals.
Investment advisory services Baron Advisory Services, LLC, a Registered Investment Adviser. Insurance products and annuities offered through Keith Steven Beggs, TX insurance license #1587744.
P.S. – Please share this article with others by simply clicking on the blue social media icons at the top of your screen!
Annuity123 does not offer insurance, investment, or tax advice. You should always seek the guidance of qualified and licensed professionals concerning your personal insurance, investment, or tax matters. Annuity123 is simply a platform allowing retirement planning professionals to help educate the community on various retirement planning topics. Annuity123 does not directly support or take responsibility for ensuring the accuracy of the content displayed in the articles themselves or any feedback that may get added in the Comments section from the community.