The more we watch the media the more important it is to remind ourselves of what constitutes proven investment truths. We would like to give credit to an article by Ben Carlson at www.wealthofcommomsense.com for putting together 36 investment truths that serve as a good reminder from time to time. Listed below are a few of the most important ones, in our opinion, with our comments below.
“Higher investment returns mean taking greater risk.”
The key word is “risk”. Speculators define risk as “loss of capital”. True investors define risk as volatility. In the fullness of time, investing in a solid equity fund holding a diversified portfolio has historically provided a positive return and been better than most other options.
“If you want or need a guaranteed return, accept it will be lower.”
Short term needs should not be invested in equities – only a high interest savings account. However, although you may want a guaranteed return, you may need something better to achieve financial security.
“Risk can change form but it never really goes away.”
Just as higher returns mean accepting greater volatility, accepting a lower return to achieve less volatility and more stability may risk financial hardship in the future as inflation eats away at our purchasing power. Most people should be more concerned with running out of money over the long-term than with any short-term market correction.
“No investment strategy can outperform all the time.”
There is no investment approach that works well all the time – nor can anyone change their strategy appropriately so it works in every situation. However, how an investment is allocated to bonds and equities (vs which bonds or equites) is the most significant determinate of return. Investment strategies based on suitable equity and bond allocation, long-term historical probability and a degree of faith work best.
“Smart people don’t necessarily make good investors.”
History includes a multitude of very smart people who made very bad investment decisions. We keep dozens of articles from so called stock market experts who predicted a double dip recession after the 2008 financial crisis – which never happened, as well as many other overly pessimistic or optimistic recommendations.
“Reasonable investment advice doesn’t really change all that much but most of the time people don’t want to hear reasonable investment advice.”
We are a society of the 8 second sound (or video) bite, selling the sensational as well as the “timing and selection” of investments. Good long-term investing involves following a plan and is boring – and you’ve likely heard that before, but it just isn’t all that interesting, especially in 8 seconds.
“No one can predict the future with any degree of accuracy.”
If it could be done then most of the forecasters would all be wealthy. Listening to market forecasts continues to take up a portion of the news – despite having no historical basis of accuracy. What catches us all is the “spin” many commentators put on what is happening – sometimes you just can’t explain why something happened – you just have to accept it.
These are just of few truths that need to be followed to ensure long-term success. Remember, our job is to keep our clients focused on what works over time; to recommend strategies and follow plans that are proven to work and avoid the cycles of greed and fear in the media and financial market.
