At the start of every year, Wall Street strategists, stock market prognosticators and many others roll out with bravado their top 10 predictions for the upcoming year. These forecasts range from the stock market’s yearly percentage gain or loss, where the 10 year US Treasury yield will be at year-end, the price of oil in twelve months, disruptive global events etc.
While these predictions are often provocative, the vast majority of forecasts are dreadfully wrong and fairly useless. I understand the need and desire for forecasts. It’s human nature to speculate and promote one’s view for various reasons. However, it can be difficult for some to tell themselves that they have no idea what the future will bring, even if it’s the truth.
Unfortunately, consistently acting on predications is filled with risk and can distract from the importance of managing investments for clients and adhering to a well thought-out, simple plan.
Drum Roll, Please…..
Therefore, for the upcoming year, I will spare you from any forecasts because like the many predictions, they will be way off mark and be of little use for nerves, portfolios and financial goals.
However, this year I am rolling out my Top 10 Principles. These principles have been formulated and refined over the last several decades by personal and professional experiences, client interactions, writings, readings and observations. Unlike a market strategist’s Top 10, these principles don’t change from year to year and can be key building blocks for effective and confident investor behavior, disciplined goal-based investing and calmer nerves.
So, for the first time, I unveil my Top 10 Principles:
- Investment returns over a lifetime will largely be determined by one’s behavior during the volatile times.
- Excessive confidence, leverage and impatience are great fuels for risk. Humility, a well thought-out plan and patience are the enemies of risk.
- Know if your financial advisor’s first duty is to you or his or her employer.
- We feel the pain of investment loss more acutely than the joy of investment gain. A longer time horizon, proven investments and an appropriate asset allocation can dull the pain of investment loss.
- Constant, haphazard trading without regard for underlying facts and goals causes damaging investment losses and anxiety over time.
- Understand why your investments are being managed a certain way and if they are aligned with your long term goals and risk tolerance. This includes the ability to understand why things are going well and, importantly, not so well.
- There are two ways to prepare for major market gyrations. One way is to expect them and the other is to predict when they’ll occur. The former is not difficult and helpful and the latter is nearly impossible and usually backfires.
- The most recent stock market decline may look like an opportunity. Every future decline can look like a risk.
- Oscillating investor emotions are a major factor for market returns shorter term. These moods don’t care about future corporate earnings or GDP. Therefore, trying to pick the bottom or top of the market during emotional periods is usually foolish.
- Occasional volatility is the cost of eventual gains. There are investments that are not volatile. Though they are FDIC-insured, they produce the exact returns targeted but can fall short of goals after inflation.
Enjoy All The Bright Promise Of A New Year.
- David Hone, CFA