In January, we blogged the “10 important investment resolutions for 2011” as listed by Brad Steinman, Director of the Canadian arm of Dimensional Fund Advisors. Brad’s goal was to warn investors away from “ill-advised practices that are detrimental to their wealth” and hopes that “a set of New Year’s Investment resolutions, along with an advisor capable of helping investors adhere to them, will lead to a more prosperous future.”
As we mentioned in that post, we’ll visit these resolutions periodically throughout the year and provide some commentary on each.
Resolution #3: I will not invest based on a forecast—whether it is mine or anyone else’s. I will recognize that the urge to form an opinion will never go away, but I won’t act on it because no one can repeatedly predict the future. It is, by definition, uncertain.
TAAG Thoughts: We’ve covered this topic in a variety of ways in this blog, but it’s always a good time to refresh. Uncertainty can have a significant impact on the market and we’re desperate to gain any information we can in advance of others, hoping to gain an edge in our investment portfolio. Many have made fortunes selling their purported ability to forecast uncertainty ahead of others, but to no avail. The truth of the matter remains that the unknown is the unknown. We are all at its mercy. The best defense against the unknown when it comes to investing continues to be a low cost, broadly diversified portfolio which can lessen the blow of uncertainty’s impact in any one area of the market.
Resolution #4: I will keep a long-term perspective and appropriately consider my investment horizon (i.e., how long my portfolio is to be invested) when determining my performance horizon (i.e., the time frame I use to evaluate results).
TAAG Thoughts: This is an important one that’s very intuitive, but easy to forget. Often when we meet with clients, especially early on in the relationship, questions surround current political, economic and other issues of the day that are concerning for one reason or another. We’re happy to talk about these issues and they’re often concerning for good reason, but they’re never cause for modifying investment strategy. Average life expectancies continue to climb and, for the majority of our clients, investment horizons can be expected to last 20-30 years or more. Over those many, many years we will have ups and downs of all varieties caused by any number of events.
It is crucial to understand the role of short-term, high quality fixed income investments as a buffer from those short term events and the role of equities to provide that continued growth over the long run. Both work in concert, allocated properly to your risk tolerance and long term goals, to provide a plan that will ensure that your money outlives you and not the other way around.
The consistent theme in many of these resolutions is our behavior surrounding events that might cause us to veer from our financial plan. It’s ok to have these emotions, but we need to recognize that they’re often fleeting and no cause to act. As investment author Nick Murray recently said, “you can act your way to investment success, but you can’t react your way.”
We’ll continue to visit these topics throughout the year, touching on these basic, but crucial pillars of our investment philosophy.