Whether you’ve been investing for decades or are just getting started, this list will hopefully shed some light on a few key principles that may help improve investors’ odds of investment success in the long run.
1. What sort of competition do I face as an investor?
Competition is stiff! The market is an effective, information-processing machine. Millions of market participants buy and sell securities every day and the real-time information they bring helps set prices.
Trying to outguess market prices is DIFFICULT and that’s GREAT NEWS! Rather than basing an investment strategy on trying to find securities that are priced incorrectly, investors should rely on the information and efficiency to help build their portfolios
2. What are my chances of picking an investment fund that survives and outperforms?
About the same as flipping a coin! Selecting an investment fund that will be around in 15 years is about 50/50 odds. Regarding out-performance, the odds are worse. The market’s pricing power works against fund managers who try to outperform through stock picking or market timing.
3. If I choose a fund because of strong past performance, does that mean it will do well in the future?
Nope! Selecting mutual funds based on past returns isn’t ideal. Research shows that most funds in the top 25% of previous five-year returns did not maintain a top ranking in the following year. Past performance offers little insight into a fund’s future returns.
4. Do I have to outsmart the market to be a successful investor?
Financial markets reward long-term investors. Historically, the equity and bond markets have provided growth of wealth that has more than offset inflation. Instead of fighting markets, let them work for you.
5. Is there a better way to build a portfolio?
Instead of attempting to outguess market prices, investors can instead pursue higher expected returns by structuring their portfolio around dimensions of expected returns like company size, price, profitability and risk.
6. Is international investing for me?
Diversifying only within your home market may not be enough to offset risk. Global diversification can broaden your investment opportunity set. Investors should seek returns wherever they occur.
7. Will making frequent changes to my portfolio help me achieve investment success?
It’s tough, if not impossible, to know which market segments will outperform from period to period.
It’s better to avoid market timing and other unnecessary changes that can be costly. Allowing emotions or opinions about short-term market conditions to impact long-term investment decisions can lead to disappointing results.
8. Should I make changes to my portfolio based on what I’m hearing in the news?
Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. If headlines are unsettling, consider the source and try to maintain a long-term perspective.
9. So, what should I be doing?
Work closely with a financial advisor who can offer expertise and guidance to help you focus on actions that add value. Focusing on what you can control can lead to a better investment experience.
- Create an investment plan to fit your needs and risk tolerance.
- Structure a portfolio along the dimensions of expected returns.
- Diversify globally.
- Manage expenses, turnover, and taxes.
- Stay disciplined through market dips and swings.