Strategy

When investing many people hear their friends or colleagues talking about their investing successes. In many cases this involves investing in high risk ‘penny’ stocks or startups. The lure of the high return is compelling to most of us. Some may even have early successes.

We must remember that this is speculating and gambling with your money. When these investments do work out it is the result of luck and not skill. Over the long term, using this strategy, the investor will be lucky to match the returns of the overall market.

Psychologists Kahneman and Tversky showed that more people would prefer to make $70,000 per year when others were making $60,000 than to make $80,000, when others were making $90,000. There will always be “others” with more assets, money, or larger portfolios. We are doomed to disappointment because comparison destroys the joy of having and using what we already have. Most people would agree to make or have less as long as others were even poorer. Resist the impulse to compare yourself to your “neighbors”.

This includes comparing your portfolio or 401(k) account balance to your colleagues. In some instances you may be better in others worse. The goal of your investments is to attain your long term goal. This would include a strategy and savings discipline.

Developing a prudent strategy and remaining disciplined to it are very difficult, however in the long term will lead to success. No one can predict what asset class or sector will outperform in the future.

Warren Buffet has one strategy which he remain disciplined to. This is the primary reason for his success.

You are speculating if you stock pick, market time or base your investing decisions on track record performance. Keep in mind speculating is ok, but not with your retirement funds.

To succeed in investing you should
own equities…globally diversify….rebalance.

There is never a shortage of predictions on where the markets will go next. These predictions are typically based on current events.

Who will win the presidential election?

WASHINGTON, DC - MAY 05: Rep. James McGovern ... — WASHINGTON, DC – MAY 05: Rep. James McGovern (D-MA) (L) and Rep. Walter Jones (R-NC) hold a news conference to introduce the ‘Afghanistan Exit and Accountability Act’ at the U.S. Captiol May 5, 2011 in Washington, DC. The bill would require President Barack Obama to give Congress a concrete strategy and timeframe for bringing troops home and report on the ‘human and financial costs of continuing the war.’ (Image credit: Getty Images via @daylife)

How will the ‘fiscal cliff’ affect the markets?

Will inflation take hold?

And the list goes on and on…

The talking heads on television need these predictions to keep viewers watching, which in turn increases advertising revenues.

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.

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 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. As I mentioned earlier, 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.

To succeed in reaching your long term financial goals you should:

Own equities….globally diversify….rebalance.

Leave the predicting to the talking heads and if you do watch see it as entertainment, not strategy.