“When people think they know something, they are inclined to act upon that knowledge.“– Paul Ebeling
To manage money better, investors believe they need to know more. But, really they need to unlearn what they think they know.
Below are just some of the Big Q’s that early in my 40 yr investing frame, I thought I knew the Big A’s to, as follows:
- Which fund managers will outperform the overall market?
- The economy, where is headed?
- What is next for interest rates and share prices?
- Is the market overvalued?
- Which stocks will beat the overall market?
- Which sectors will fare best and in what frames?
Those are just a few…
That stuff never really influenced my investment strategy. But I spent a lot time pondering them.
The Really Big Q: Why do retail investors believe they need know such things?
The Really Big A: Well, it is because Wall Street and the financial media talk endlessly about those issues.
The financial media needs to fill airtime, websites and printed pages. And Wall Street wants to convince retail investors that they know somethings about the future so that they actively manage their portfolios and by doing so generates fees
Further, people’s belief that they have knowledge stems from the way they wired. That wiring leaves them vulnerable to a host of behavioral mistakes, including believing the extension of a graph, curve, or range of values by inferring unknown values from trends in the known data will continue in the trends direction, thus convincing investors that they know what the future holds.
So, then when 1 thinks he/she knows something, 1 is inclined to act upon that knowledge.
In the financial markets, action can triggers costs and tax bills.
Often, if 1 plays with 1’s basic mix of stocks and core investments, so as not to miss a big market move, and any time 1 opts to reduce 1’s overall stock exposure, 1 lower’s his or her’s portfolio expected long-run return. And if such ‘maybe’ knowledge causes 1 to make narrow investment bets, that results in a permanent loss of capital, as such bets on stocks and market sectors that could dive and not come back to the line for a long time.
For retail participants predictions and tips often invade their behavior, making or hold off investing because they want to call the Top or Bottom.
No matter how much retail people analyze individual stocks, different market sectors and the overall market, there is no evidence they will come up with a better forecast than the professionals.
Therefore it is best bet is to not forecast and unlearn things thought known and focus on facets of investing where there some control and where value can be added. That the amount of portfolio risk taken, the investment costs incur and the taxes paid.
There are other areas of financial life where hard work and more thought can pay handsome dividends.
Civilians can substantially improve their financial life by figuring out which debts to pay off 1st, what sort of home it makes most sense to buy, when to claim Social Security, what insurance we need and what estate planning steps to take. Thus improve life by spending more thoughtfully, saving more diligently and by learning the discipline needed to change the damaging financial behavior embedded by conventional wisdom.
None, that has the seductive pleasure of making forecasts and imagining being proven right. But over a lifetime of investing, that pleasure almost always carries a steep price tag for the non professional and that is thing all need to know.
” All of the above is sound advice. If one follows a diversified portfolio with no specific investment concentrations, listens to professionals, and balances risk with returns plus understands the need for short term gains versus long-term loses, then they should be able to guide themselves through the maze of opportunities presented by Wall Street.
“If one who is less trained than the professionals, then they should be prepared to expect losses. The costs of a stockbroker is insignificant for it is the broker who depends mostly on research and his Firm’s advice verses hearsay cocktail talk or the quick opportunity guys who try to promote hot stocks.
“Also too try to look at a stock prior performance, its earnings, balance sheet plus its capitalization ratio, now and in the future plus its capital needs. The latter too often dilutes existing shareholder interests and thus reduces the opportunity for adequate capital return.
“My best advice is to not try to outguess Wall Street. A good investment strategy is not try to overly risks profits either. One must understand too “margin” investing, borrowing money against the potential for more profits. In most cases this does not work.
“One must also control their personal debt and overhead requirements so as to not become a victim of necessitated selling in order to meet living or debt obligations. Two Key questions one should ask oneself, can I afford a loss or trying up my capital as my debt mounts or becomes more costly and second, what are you expectations for capital appreciation and when?,” says Live Trading News editorial contributor Bruce WD Barren.
Money management and financial analytics is Key, have professionals do it for you, the rewards outweigh the cost, as the best are performance based.
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Have a healthy holiday weekend, Keep the Faith!