Einstein’s Theory… of Investing

When investors look at an asset manager performance record they looking for  a repeat performance. This is seldom the case. There is zero correlation of past performance to future results. The investor best solution is to own equities, globally diversify and rebalance. This includes hiring an advisor who will keep them on track.

Investment Frontiers Symposia
Image by apec2011ceosummit via Flickr

Here’s real wisdom from Einstein. He defined insanity as doing the same thing over and over again and expecting different results. Welcome to the world of investing where brokers and financial pundits start each year hoping you are as uninformed as you were last year. They depend on your lack of familiarity with the overwhelming data indicating they are emperors with no clothes, whose real expertise is separating you from your money by pretending to have the ability to predict the unpredictable and to bring order to random events.Around this time last year, the respected journal Pension & Investments published an article titled: For 2011, it’ll be all about equities. A survey of 2,007 responding institutional investors picked “winning” asset classes for 2011. Stocks garnered the most votes with 40%. Commodities were next and bonds came in last.

James W. Paulsen, chief investment strategist at Wells Capital, predicted the S&P 500 index would reach 1425 and achieve “possibly” a 15% total return.

The reality was quite different. The S&P 500 closed the year at 1,257 — almost exactly where it was a year ago. The winning asset class was fixed income. A broad index of Treasury bonds was up 9.6%.

Let’s give this some perspective: The biggest, best, brightest, most sophisticated and highly compensated institutional fund managers can’t predict whether stocks will outperform bonds in a given year.

How do you like the chances of your broker picking stocks, timing the markets or picking outperforming mutual funds?

My New Years wish for all of you is this: Fundamentally change the way you invest. Cancel your retail brokerage accounts. Eliminate all individual stocks, bonds and actively managed mutual funds from your portfolio. Don’t listen to anyone who tells you they can add “alpha” by “beating the market” or predicting whether it will rise or fall. Ignore the financial media with their breathless predictions about the impact of yesterday’s news on tomorrow’s prices. Don’t succumb to the sense of urgency which causes fear and panic. Stop the transfer of wealth from your pockets into those who “advise” you.

Follow Einstein’s advice and don’t repeat your mistakes. Do that and I like your chances of having a happy and prosperous New Year.

Great advice for any occasion.

Please comment or call to discuss.

Enhanced by Zemanta