STRATEGIES FOR INVESTING SUCCESS
1. Eliminate speculating and gambling
The average investor using traditional investment advice that tried to beat the S&P 500 made a meager 4.25% for the period of 1993-2012. Over the same 20 year period, the S&P 500 averaged 8.21%*.
Why are the results so poor?
Negative investor behavior or activity. Don’t mistake that stock picking, market timing, and chasing performance (such as using Morningstar “star ratings” to pick mutual funds) will lead to improved investment returns. The majority of brokerage firms and insurance companies are rewarded for the sale of product. Do they mind you jumping in and out of the market—of course not—they win whether you win or lose.
*Dalbar, Inc. Quantitative Analysis of Investor Behavior 2013. *Past performance is no guarantee of future results.
2. Use market forces. Don’t fight them.
Don’t fight free capitalistic market forces by attempting to beat the market. Prudent investment advice will show you how to harness the power of free capitalistic markets and create institutional-size, structured asset class investment portfolios that capture market rates of return.
Investors are often surprised and delighted to learn how generous market rates of return have been over long periods of time. The following graph lays out the returns from various free markets. Remember, there’s absolutely no stock picking or market timing required historically to achieve these returns.
Annualized Capital Return
|US Micro Cap Stocks||12.26||1927-2012|
|S&P 500 (Large US)||9.82||1927-2012|
|Small Cap Value||14.77||1927-2012|
|International Small Co.||14.40||1970-2012|
|International Large Co.||9.06||1970-2012|
Performance figures taken from Dimensional Fund Advisors, Inc. (DFA) Returns software 12/31/12. Some data provided to DFA by the Center for Research & Security Pricing (CRSP), University of Chicago. Asset Classes defined as: S&P 500 Index for U.S. Large stocks, CRSP 9-10 Index for U.S. micro cap stocks, Morgan Stanley Europe, Australia Far East (EAFE) Index for international large stocks, and the international CRSP Large Value Index for Large Value and CRSP Small Value Index for Small Cap Value.
3. Hire a coach.
Financial planning and traditional investment advice is a people problem, not necessarily a portfolio problem. The most common result I see is fear, anxiety, confusion, complexity, and a reduced ability to take action on your own behalf.
An investment advisor acting as your Investor Coach helps you wade through complex issues and maintain discipline around the investing process. You’ll make prudent investment decisions about how much risk to incorporate into your portfolio; he or she will help you to distinguish prudent from imprudent risk; he or she will aid you to truly understand and measure diversification in your portfolio.