When I first started in the investment business 20 years ago my firm talked about beating the market with active managers. That is picking stocks that would beat the market.
They showed me the past performance of the ‘hot’ manager who beat the market for one or two or even three years. I would then recommend and sell to clients these fantastic performance numbers.
What followed in most cases was disappointing performance. Statistics show that less than 20% of the managers beat the market in the previous period. However, they are seldom if ever the same managers or stock pickers.
Today ‘hot’ tomorrow ‘not’.
This trend continued and my firm promoted new ‘hot’ managers each year.
I even tried picking stocks on my own. Some huge losses along with some huge gains. Over time I fell slightly short of the market returns I was trying to beat.
I began to question this practice because my studies in college and graduate school and my studies for the CFP certification told me it did not work. Stock picking and market timing have been proven not to work.
The firm’s response was classic. It is different this time. Or ‘that is true in theory only, it does not apply to the real world’. However over time I found it was not different. I found that markets are too efficient for anyone to consistently ‘beat’ the market.
Now there are stock pickers who beat the market over the short term, which is less than three years. But the likelihood of repeating this stellar performance was highly doubtful.
When these ‘hot’ stock pickers go bad they go bad very quickly and it gets really ugly, real fast.
Everyone wants to know what will happen next. In many cases, we make emotional decisions based on the latest short term predictions. These decisions will in most cases result in very disappointing performance, long term.
If you wish to succeed long term in reaching your financial goals, you need to develop a prudent strategy and remain disciplined to that strategy. Most important you must have realistic expectations.
Proper expectations are the key to investing with Peace of Mind.
Do not expect to predict or forecast stock prices and movements.
Do not expect to pick winning stocks and beat the market.
Do not gamble and speculate with your lie savings.
Do expect to achieve close-to-market returns over time and to see daily, weekly and yearly volatility. Reduce your costs, use diversification, and sit tight. If you expect the impossible you will be frustrated, unhappy and fearful.
All of us would like to get rich quick. However, if this is your strategy, odds are you will be very disappointed. Develop a lifelong game plan and stick to it. The only adjustment you should make is to gradually become more conservative as you get older.
Ideally you should find an investor coach/fiduciary adviser who shores this philosophy.
To succeed in reaching your long term financial goals you should:
Own equities….globally diversify….rebalance.
Leave the predicting to the talking heads on TV and if you do watch see it as entertainment, not strategy.
