What’s an investor to do?!

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An old joke quips “the only certainties in life are death and taxes”. While dredging up that old joke may cause many to groan, the cynical groan sometimes overlooks the truth to the saying. If there are only two real certainties in life, how can anyone accurately predict the future?

 

I would say they can’t. That’s a scary statement to make. Anything you can’t predict, you can’t control. And that’s where the fear and worry come in. The realization is that part of your financial life is out of your control. But this is nothing new. We’ve had to accept this reality before, and there are plenty of time-tested strategies for coping with uncertainty:

 

  • Focus on what you can control

    • “Am I saving enough?”

    • “Do I have too much debt?”

    • “Do I have an emergency fund?”


  • Take time to understand your personal fears and worries as they relate to the broader world. “If taxes go up, how will that effect my personal financial situation?”

  • Find ways to channel the energy you expend on worrying into more productive activities. “I am upset with the current political situation. I’m going to join an organization with like-minded people to affect changes in local, state or federal government.”

  • Take a break from the economic news on the TV, internet, or radio. Most of this news does not enrich your life. The media’s goal is to attract viewers, not provide personal advice on how to achieve your goals.

It may seem like I’m borrowing from psychology. Well you’re right! We are emotional people, and it’s unreasonable to think we won’t allow our emotions to affect our financial decisions. This emotional reaction, however, is often counter-productive to successful investing.

For example, often the best time to buy stocks is when we have the least desire to do so. That’s why it’s often helpful to let a trusted third party help you maintain your investment discipline.

The core principles of investing are much like timeless fashion. Every season, fashion designers are trying to convince consumers to buy the “hot must-have” trends (harem pants anyone? No? I didn’t think so…). But the timeless core fashion pieces rarely change (a well-tailored suit or a little black dress). The same holds for investing – focus on the timeless core principles:

 

  • Risk and return are related. Some risk is worth taking because it is rewarded by potential returns. But you never get a better return without taking on a corresponding amount of risk.

  • Markets work. For investment purposes, securities (i.e. stock, bonds, etc.) are priced accurately. Sure, prices are not perfectly priced all the time. But most of the time, you don’t find that out until after-the-fact. That’s not very helpful if you’re relying on mispricing as your investment strategy.

  • Structure explains performance. The way investments are put together in a portfolio is more important than the selection of any particular security or the timing of buys and sells.

  • Invest for the long-term. Despite what you may hear otherwise, true wealth in the stock market is made by those who are patient.

  • Diversification is important. It helps reduce some risks that are not worth taking.

I hope this article has put some perspective on worrisome times. We purposely refrained from prognostications about the shape of the US, world, markets and economies.

 

Remember, when you try to make guesses about future outcomes – you’re gambling. When you gamble, the odds always favor the house. But when you invest, you’re interested in long-term benefits which favor the investor.