Fred, a hypothetical investor, was so sure of himself about his investments. He had always handled everything on his own and felt he was doing a great job. Then with some tumbles in the markets and some changes in his life situation, he decided to get a second opinion from an investment professional introduced to him by his best friend, Jim.
The financial advisor and Fred met and discussed Fred’s investments. Finally, they both agreed for the financial advisor to do a deeper dive analysis of how Fred’s portfolio had performed relative to appropriate benchmarks and how Fred’s choices about security selection and asset allocation were likely to support Fred’s financial goals.
After preparing the analysis, the financial advisor met with Fred to try to help understand where he stood and what had gone wrong as well as what had gone right. Later, after the conversation, Fred began to realize that what he believed about investing was not necessarily true. Here are some investing truths/myths that merit some attention and consideration.
Follow your instincts
In many areas of life, following our “gut instinct” may be valuable. However, with investing, it can mislead us and send us down the wrong path. Market activity often has a way of capturing our emotions, not our intellect. If the stock markets are surging to new highs, greed says we need to jump on the bandwagon lest we miss out. Then, as the markets decline, fear sets in and we feel compelled to get out as quickly as possible. Many end up buying when markets are high and selling when markets are low, the exact opposite of what will help us to succeed with our investments. If you are able to tolerate the volatility or risk, a better strategy may be to ignore your gut instinct and be brave. As Warren Buffett put it, “Be fearful when others are greedy and greedy only when others are fearful.”
Investments are complex and maybe even mysterious
Some people who work in financial services seem to like to use complex jargon and lofty-sounding terms like technical analysis, alpha, beta, R squared, fundamental analysis, correlation, and so much more. Many investment products are offered with mind-numbing, sleep-inducing complex explanations that seem suggest that only a select few have the capacity to fully grasp the esoteric fine points, way beyond the scope of the average human just trying to invest their money and better their lives. The truth is that there is a certain amount of complexity with investments and that most people may be better served by engaging with a seasoned, qualified investment professional. However, that said, if the investment professional you are working with can explain things at your level where you fully understand it, great. If it sounds too complex or too good to be true, shy away from it. In today’s investment world, you can own mutual funds or exchange-traded funds and get a good cross section of the market universe without having to acquire advanced degrees in finance. Keep it simple and understandable.
Big “blue-chip” dividend paying stocks are safe
Big, well-established companies with great financial performance and a solid dividend history over longer periods of time are often touted as safe, secure options for the conservative investor. And many times, that may be true. After all, they have been around forever. What could possibly go wrong? The problem is, things change over time. In 1982, two of the most valuable companies in the country were General Motors and Eastman Kodak. Today, shares of those original companies are worthless. In 2005, General Electric was the world’s most valuable company. After cutting its dividend, the stock is down substantially in price from its once lofty positioning. In 2008, Bank of America was one of the nation’s highest dividend paying stocks. Then BofA cut its dividend in the wake of the financial collapse of 2008 and the stock price plummeted. Today the stock price for Bank of America is still not back to pre-2008 levels.
A safer approach is to own a broad portfolio of many stocks, giving you the benefit of diversification to protect you when something goes wrong. If you own one stock, you are very concerned with the performance of that single stock. If you own shares in 100, 200, or maybe even thousands of companies, a change of fortune for one company doesn’t mean financial ruin for you. You may not even feel the “blip” on your investment reports.
Buy stocks in quality companies that are profitable and growing
Good companies that are profitable and growing should be great investments. Right? Well, sometimes that may be true, but often “bad” companies can be valuable investments. Over the long run, it is often true that the shares of top-performing, fast-growing companies end up under-performing the stocks of companies that are not growing as much or even declining. The reason is that stock prices of growth companies often reflect investor expectations while the shares of low growth “value” companies reflect low investor expectations. Many times, “value” companies can perform better than investor’s low expectations. Value investing and growth investing both have their place, but usually these run in cycles.
Investing is fun and exciting
Sometimes excitement or euphoria with investing can be signs of trouble down the road. Day trading during the dot-com bubble may have been exciting, but the aftermath was not so pretty. Flipping houses during the real estate bubble may have been fun, until it all came crashing down. Watch out for the high that comes from quick profits. Alternatively, consider that sensible, long-term investing might be a little dull and unexciting. Owning a broad cross-section of the world marketplace through owning mutual fund shares or shares of exchange-traded funds (ETFs) may not be all that fun or exciting, but it avoids some of the pitfalls of getting too excited about the “hot” trends of the day.
Looking in the rearview mirror will help you navigate where you are going
Many newly offered investments are sold touting hypothetical performance based on historical data. While studying the past can be helpful, there is no guarantee that the future will look exactly like the past. As an investment professional, I am bound by professional ethics to remind clients that “past performance is no guarantee of future results”. It is fine to study the past but use common sense and a forward-looking analytical process to help guide your decisions. Buggy whip makers and horse drawn carriage makers did a big trade until automobiles came along. Telephone companies invested in millions of miles of telephone lines all over the country only to see cellular phone technology replace many landlines with cell only service into the home. My wife and I have not had a land line in our home for years now. We exclusively use our cell phones now. Our wired telephone outlets installed throughout our home lie completely unused. Recently I installed internet based phones for my office, so the landline wiring in our office building has been rendered useless. Times change, technology changes, and the rear view mirror continues to be a poor substitute for the windshield looking forward.
A personal message and closing thought
If you want more guidance on planning for the future, be sure to visit my website at www.erichutchinsonfinancial.com. There you will find many helpful, free resources such as blog posts, videos, and other resources that will assist you in managing your financial life. If you haven’t already obtained a copy of my book “The Financial Briefing: Answers to Life’s Most Important Money Questions”, there is a link on my website that will take you directly to my book page on Amazon.com
If you would like a free, no obligation private consultation directly with me to evaluate your situation, contact me directly by phone at 501-823-2171 or send an email at firstname.lastname@example.org. I love helping people plan for their financial future and it would be my pleasure to help you. I look forward to hearing from you.
Other Important Information
The opinions expressed in this commentary are those of the author and not necessarily the views of United Capital Financial Advisers, LLC. Certain statements contained within are forward-looking statements, including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. This material is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. United Capital does not warrant the accuracy or completeness of the information. The commentary is intended for information purposes only, is not a recommendation to buy or sell any securities and should not be considered investment advice. Past performance doesn’t guarantee future results.
Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. The information contained herein is intended for information purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. ETFs will fluctuate with changes in market conditions and are not suitable for all investors. Please contact your financial advisor with questions about your specific needs and circumstances.