Do We Know We Don't Know?

It's a really good question and one which, evidentally, most people get wrong most of the time. 

The good news (sort of) is that the people that get it wrong are a lot more of the people than you think. 

We've been pursuing passive investment strategies now for more than a few years, knowing that we do in fact know. 

I love it when an article concludes with the comment: "Finally, it's my experience that the vast majority of investors don't even know what their returns have been relative to appropriate benchmarks. One reason is that Wall Street doesn't want you to know- if you did, you might stop making it rich. Another might be that the truth would be too painful, so investors themselves don't want to know. But you should know. Without such information, there is no way to know if your strategy is working."

In this great article, "On Magical Thinking and Investing" Larry Swedroe hits all the high notes. 

Read "On Magical Thinking And Investing" here. 

Are Fund Managers Ever Worth The Cost?

One of our core beliefs is that investors should always pay attention to the expenses of their investments. Every dollar needlessly spent chasing returns is a dollar that should be in your pocket not someone else's.

Reducing the money that you have at work by paying costs that don't directly result in bottom line benefits to you will hurt your chances of meeting your long-term goals.

A strategic decision for every investor is the passive v. active decision and this is where one decision can save a lot of money over time. And, because we're talking about expenses, the savings are a sure thing.

In theory, investors pay for active management because a manager will use their skill in security selection to outperform and index such as the S&P 500. Well, the cost of trading, research and such all raise your bottom line costs, perhaps to an unconscionable level.  

Does this additional cost result in additional returns? No, according to CNBC.com in this recent article "Market Pros Had a Bad Year, So Why Not Buy and Index Fund?"

Are you paying too much for your current investment program? Want to find out for certain if you are or not? Use our Connet With Us form to let us know, we'll contact you to arrange a mutually convenient time to meet. Our evaluation is done on a no-cost, no-obligation basis. 

How To Keep Your Emotions From Costing You Money

Success is often the result of a culmination of all the decisions that you make. Improving your decision making will your results. There's an almost endless search to improve our decision making, especially when it comes to money, most notably, our decisions about our investments. 

Can you learn to make better investment decisions? There are some keys to making better investment decisions that you can learn. They require awareness, discipline and practice. Here are 5 concepts you should be aware of that you can focus on to improve your overall decision making: 

1. Tomorrow will not be the same as today- in the world of behavioral economics this is known as recency bias. We tend to make our decisions based on the latest available set of information we have at our disposal. The world is a constantly evolving place, and then by default, today's information won't be tomorrow's information. 

How might this affect you as an investor? Don't base any of your long-term decisions on "good" or bad" news about a company or an industry based on today's headlines. That makes it an emotional decision. Stay focused on your long-term thinking and strategies. The ability to stay-the-course will keep you from the perils of both over exuberance and overt pessimism. 

2. Use short-term goals to achieve long-term results- we'd all benefit if we could focus more on the things that we need to do to improve our situation and less on how our investment returns are doing. Being consistent, or even better, making small improvement in the things that we can control, such as savings and spending, will be at least equally as important as how your investments are performing. 

3. This time is just like last time- in a rush to find answers we often link events that have no real reationship to each other and then we draw the wrong conclusions, leading to poor decisions. The 2008-2009 market and the 1987 market downturn is an example. While certainly there were things about each of these times (like they went down a lot and you were scared) that were similar, there was really almost nothing similar beyond that as it related to the overall market conditions. Many investors decided to "get out" of the market, thereby selling low; and then jumping back in after the market had recovered which meant that they were buying high. 

4. Believing that you can pick winners- over-confidence in our own abilities often leads us to believe that we can pick winning investments, be it stocks or funds. History shows that we can't pick enough winners enough of the time to craft a winning long-term strategy. Building an investment portfolio is like building a business team, a sports team or any other high performance group; go for consistency across the board and let your heroes/winners rise to the top from amongst a group of high quality, well informed choices. 

5. Unlinking Risk and Return- we almost always lose sight of the inexorable link between risk and return. On average, we want our investments to earn more money than the risk we're taking to own them. Wouldn't it be great if we could find investments that had the potential to earn 10% but would never go down in value? Well the reality is that risk and return go hand-in-hand so expect that there'll be volatile times and don't over react to the inevitable down turns that come when you're building a portfolio for long-term growth.

Sound decision making in investing comes down to a host of things that only partly have to do with your investments themselves. Success is based on the decisions you make as much as anything else. Make sure that your decisions aren't clouded by the emotional issues related to the five concepts I covered today. Base your investment decisions instead on long-term strategic objectives and a prudent financial plan.