I hope you remember this post the next time you have a twitter troll or some financial version of Ms. Cleo telling you exactly what will happen in the stock market.
Certainty is not a luxury that comes with investing. Successful investing focuses on probabilities and maintaining emotional discipline. We have to understand and accept that the future is uncertain. Investments performing well can get more expensive and low performing investments can get less expensive. Yesterday’s winner may or may not be the same tomorrow.
This uncertainty is a primary reason that diversification is critical to investment success. Most advisors talk about diversification’s benefit being that it reduces risk. While this can be true, for the young professional investing for longer term goals, diversification provides an even greater value. The greatest benefit to diversification is controlling the fear of missing out (FOMO), which helps avoid performance chasing.
Take a look at the last twenty years of returns from some of the available asset classes:
International stocks? Real estate? The S&P 500? Bonds? What will be the best investment over the next ten, twenty, fifty years? The honest answer is nobody knows. We can analyze the current environment and make educated investment decisions based on current conditions. However, we can’t reasonably expect to always be right. Having diverse investment exposure will prevent you from chasing performance, which data shows is a costly way to miss your goals.
Owning and holding a mix of investments sounds easier in theory than in practice.
Some investments seem like they just refuse to make you money and some perhaps are even costing you money. The secret to diversification that will save you headaches and allow you to create long-term wealth is, at any given point, you are going to hate something in your portfolio. You will be asking yourself, “why on earth do I own this loser?” This feeling could last years! When this happens, be sure you weigh your options. Do not reactively jump to giving up on the investment. First, go back to your financial plan and ask, “why did I make this investment in the first place?” Consider if this reason still exists, or if circumstances have changed. Answering these simple questions will prevent you from making impulsive and financially damaging decisions.
Keep in mind that you can’t foresee what will be tomorrow’s winning investment. Your investment policy statement exists to save you from making reactive decisions during the fluctuation of the market and in a media-driven society. Don’t have an investment policy statement? Call us today. We can’t wait to develop this strong foundation for your portfolio and future investment decisions.