I meet with individuals on a daily basis that have different perceptions of the world, and how they should react with their portfolio:
I’m worried about what’s going on in the world, I want to sell out of international stocks.
International stocks have been down more than domestic, I feel like it’s a great time to buy.
Both clients have valid reasons to think what they do. So, who is right and who is wrong?
I don’t know enough about the market to tell them what will happen with stocks over the next week, month, or year. I do know however that the above messages include underlying perceptions of investing that are rarely productive, and never consider an individuals goals.
In a recent TED talk titled Perspective is Everything (warning: an instance of foul language is used), advertising guru Rory Sutherland discussed this idea of perception, and specifically how economists (and likely the ones my above clients take their cues from) have the wrong perception of how to assist people in making the best decisions. He points to an often ignored school of economic thought (economics of the Austrian school) that instead of studying mathematical models, places its focus on psychology to determine why people act in order to find solutions to economic problems.
Most investors have bought into an investing paradigm that involves beating something or someone (neighbors, family, etc.), or maximizing yield. It makes sense why so many people equate this idea to investing since this is the exact paradigm they hear from so called ‘experts’ of investment management – “I best the markets.” The piece of their reasoning that doesn’t always translate is that they need to beat the markets to justify their jobs; that doesn’t mean what they offer is what you need.
As an advisor I rarely talk to clients about performance or winning investing as if it is a game. While it may be in an investment managers interests to take gambles with your money, it is not in yours.
Rather, I encourage investors to focus on the reasons for investing, and pick the best investments that meet those objectives, rather than starting with the objective of ‘winning.’ I use the acronym GPS to describe the starting point investors should have to qualify an investments usefulness.
Growth. All investors seek growth, and historically growth is best achieved by participating in the profits earned by successful businesses.
But, while most stock mutual funds fail to beat the markets, most investors with a ‘win at all costs’ mentality get burned, or waste countless hours jumping from one hot fund to the next in search of an extra percent return. The activity of buying into one hot fund at a high, and moving out of it after it falls on tough times often leads to a significantly lower portfolio returns than what would have been achieved by staying put.
Stability. Investors also want safety, but the question they rarely ask is – “How safe is this investment?” I hear far more often – “How much does it earn?”
The rule to remember here is don’t sacrifice safety for yield. Instead of thinking about what often amounts to a few extra dollars a year, ask yourself – “What are the chance of this money being there for me when I need it?”
Principal preservation is another goal of investors; to have their money not only stay stable, but increase as prices rise. I typically talk about it out of GPS order because a combination of Growth and Stable investments may provide the right mix to achieve a portfolio that keeps up with inflation. These may be real assets like real estate, precious metals, currency, or real goods. Think about these investments as providing diversification benefits first over providing winning returns.
Instead of pouring over funds and worrying about what fund or investment will outperform the others, a less stressful and far more productive strategy for individuals is to figure out how much you need to have invested for each category, select investments based on how well they match category criteria and not on returns, monitor those investments, and control the factors you can (avoid investing with companies with poor stewardship, poor performance, and excessive costs). This activity of determining how much you need in each category aligns your investment selection to your individual goals.
Invest today in a changed perception, from trying to win the highest return, to following a purposeful investment selection plan which will ease your stress, align your portfolio with your personal goals, and likely increase your returns.