What Not to Do While Investing in the New Decade
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At the beginning of 2009, no one would have predicted that 41 out of the 45 global stock markets would experience returns in excess of 25%. The stock market regularly makes fools out of those who think they can predict short-term results. 2009 was no exception as the market's gain surprised all the pundits.
However, being human, we all have an addiction to prediction. We will not resist the temptation to make our own predictions of the general public's investment experience for the next decade.
Five investment predictions that we hope are wrong:
1. Investors will continue to chase performance. Investors will buy after the investment has gone up in value and sell after the investment has collapsed. Unfortunately, current evidence already supports this prediction. During the past decade, bonds outperformed stocks. So therefore, investors are already chasing bond performance by pouring more money into bond funds than ever before. A decade ago the trend was in the opposite direction. Everyone was searching for the "hot stock" and shunned the idea of owning bonds.
2. Wall Street will continue to fleece unwary investors. Wall Street will continue to invent new products and strategies that will claim to reduce risk and increase return. Investors will buy the promise of above-average returns with minimal risk and regret the decision.
3. New investment bubbles will form. Tempted investors will abandon the discipline of asset allocation and diversification in favor of the next "can't miss" investment. We entered this past decade with investors crowding into technology stocks creating the "tech bubble." Next there was the "real estate bubble." Could bonds, gold, or emerging markets be the future bubble candidates?
4. New investment paradigms will emerge. Every bubble comes with a new paradigm for logical justification. For example in 2000, corporate cash flow and earnings no longer mattered for "new-age economy" stocks. In 2007, it was okay to lend 100% on a home to someone without a job because real estate would never go down in value. When these paradigms are criticized, the response from their cheerleaders is always the same - "this time it's different." It won't be different.
5. Investors will continue to attempt to "beat the market" rather than "be the market." With mountains of evidence to the contrary, investors will continue to be lured into believing that they will be compensated for the extra cost associated with paying someone to pick winning stocks or time the buying and selling of the markets. For the next decade, market returns minus costs = investor returns. Therefore, the way to "beat most investors" is to own the entire market with the lowest costs.
Despite our hope that these predictions are wrong, human nature virtually guarantees that the investing public will continue to make these mistakes. Our goal is help clients avoid making these mistakes in the next decade and profit from a disciplined strategy of investment management. Happy New Decade! |
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