ARTICLES & REVIEWS
Distractions
London Free Press
Wall Street and Bay Street like to deliver a message. They would like you to believe they can predict the future. They would like you to believe that giving investment advice boils down to making a forecast. They would like people to think that they can look into their crystal ball and predict the future. But, are you well served by this type of advice? You owe it to yourself to consider another approach, one that makes no predictions but uses principals grounded in academic finance.
A growing number of advisors are successfully implementing this alternative definition of advice. Advisors and clients alike avoid the risk of speculation and they benefit from the intelligence and stability of an approach based on solid theory and empirical evidence.
"The idea that a single individual without extra information or extra market power can beat the market is extraordinarily unlikely. Yet the market is full of people who think that they can do it and full of other people who believe them.... Why do people believe that they can do the impossible and why do other people believe them? "
Daniel H. Kahneman ' 2002
Nobel Laureate in Economics
A correct investment process can be broken down into five key parts.
1. Diversification
2. Education
3. Discipline
4. Reduce Costs and Taxes
5. Holistic Approach
1. Diversify Your Portfolios
Clients should invest across a range of asset classes that is most appropriate for the individual’s goals, time horizons and tolerance for risk. As asset classes behave differently from one another each plays a different role in a portfolio. Clients can achieve greater expected returns with lower risk in a diversified portfolio. Asset allocation and a diversified portfolio are crucial.
2. Education
Understand that forecasts don't work and are generally costly. Act on intelligence instead of emotion. Most of Wall Street and Bay Street promote a short term perspective that is diametrically opposed to the principles of modern portfolio theory. Television programs and magazine covers can distract investors from their long term goals, destroy discipline and undermine wealth. It is the advisors job to make sure investors stay the course and maintain focus on the basics of financial theory.
3. Maintain Discipline
While asset pricing scientists have identified the factors that explain over 90% of stock performance, a big wild card for individual investors is discipline. Investors will not effectively capture market returns if they abandon their long term strategy in response to recent events or predictions of the future. Maintaining discipline is difficult but an important challenge that can make or break your portfolio. The foundation of this discipline is education.
4. Keep Costs Down and Reduce Taxes
Markets are uncertain but you can always control investment costs and taxes. By reducing these wherever possible, you can retain a greater share of your investment return.
5. Take a Holistic Approach
You are much more than your investment portfolio. To help meet your long term goals you need to understand your values, clarify your goals and begin with the end in mind. Income planning, tax planning, estate planning, philanthropic planning and wealth transfer planning offer a holistic approach that is at the heart of delivering the good advice.
Following these five principles will allow you to worry less about short term markets and free you from worry. Most of the predictions you listen to won't come true. When you apply diversification. lower your costs and manage your taxes to maximize your returns you are allowed to focus on optimizing your chances of achieving your long term goals.
