Many investors have unfulfilled expectations. They are looking for a better solution, one that can lead to a better investment experience. What would that approach look like? How can they improve their odds of success?
Why Invest At All?
Let’s begin by considering what you want to accomplish as an investor. Why do people invest at all? People have different financial needs and goals, and therefore, they may invest for different reasons. One major reason is to grow their wealth—for example, in preparation for retirement. Whatever their reason for accumulating money, there’s another concern that creates the need to invest: the threat of inflation.
Your Money Today Will Likely Buy Less Tomorrow
Inflation erodes the real purchasing power of your wealth. Consider an illustration of the effects of inflation over time. In 1913, nine cents would buy a quart of milk. Fifty years later, nine cents would only buy a small glass of milk. And 100 years later, nine cents would only buy about six tablespoons of milk. So, as the value of a dollar declines over time, you invest to grow wealth and preserve purchasing power.
Investing Means Taking Risks
We often hear people say, “yes, but investing is risky.” But considering the long-term threat of inflation, not investing means taking risks, too. If you don’t grow your money, you may not be able to afford things in the future.
So, how do people invest to grow their wealth? How do many people invest?
Let’s think about how a lot of people attempt to grow wealth in the capital markets. The most common approach is based on prediction and forecasting. Methods include:
• Picking stocks expected to perform well in the future,
• Moving in and out of industry sectors, or
• Attempting to time the market
These methods are based on trying to predict the future direction of the economy, the stock market, or an individual stock. This conventional approach assumes that someone has a crystal ball.
Many people think this is the key to successful investing. In fact, when people meet financial advisors or others in the investment business, their first question is typically, “where do you think the market is going?” They are basically asking that person to make a prediction. Yet, no one can know the future—and if an investment person could predict the market’s future direction, why would he share that knowledge for free? A prediction about an uncertain future is just an opinion, and it should not determine anyone’s investment decision. Many people learn this the hard way.
Some people approach investing from an emotional perspective. They act impulsively—and their reaction is typically sparked by fear or greed.
Some may get anxious about the stock market and decide to get out. This may ease their fear, but it may be replaced by the anxiety of missing out on a market recovery. Investors who flee the market ultimately have to decide when to get back in.
The 2008–09 global market downturn offers an example of how the cycle of fear and greed can drive an investor’s decisions. Some investors fled the market in early 2009, just before the rebound began. They locked in their losses and then experienced the stress of watching the markets climb.
The other side of the emotional coin is greed. Investors can get anxious about missing out on what they perceive as a great investment. They may follow the crowd.
The idea behind investing is to buy low and sell high. Yet, following an emotional investment cycle sparked by impulsive decisions may bring an opposite effect: buying at high prices and selling at lower prices.
Other people approach investing from a “get rich quick” perspective and act on tips or hunches. They may seek out investment insight from cable news programs that feature Wall Street experts who appear to know something valuable, or from other sources.
There’s also a social element to predictive investing. People like to talk about their winning investments, but they probably don’t mention the losers. People often follow the advice of friends, neighbors, or family—especially if the “insight” offers potential to make a fast, easy return. Most of this advice is just noise. We all know deep down that there’s no shortcut to growing wealth. So why do people keep investing this way? In some cases, it is all they know.
What have we learned?
One driving principle is that “markets work”—that is, market prices reflect all available information and expectations of the future. This is known as market efficiency. The forces of supply and demand are constantly at work in the financial markets, and the intense competition pushes stock and bond prices toward their actual value. People trust markets every day. For example, when shopping, you probably don’t question whether the price for an item is “right” or “wrong.” You simply assume the price reflects local market conditions. You might decide the price is too high and choose not to buy—and if enough people don’t buy the item, the price drops. This is how a market works.
Yet, many people’s perception of market pricing breaks down when they invest because they assume that the price of a stock or bond may not be right. They are conditioned to view some stocks as being “overvalued” or “undervalued.” In reality, the financial markets work much like any other market, with information and opinions affecting the price of a stock or bond. That price reflects the aggregate view of what the investment is worth at that moment in time. The forces of supply and demand push prices toward market equilibrium—and these forces are at work in the financial markets.
Here’s a simple example of a market at work. It shows how collective knowledge can come together and be more powerful than the knowledge of any one person.
So, consider how this aggregation of knowledge and opinions works in the financial markets. Millions of participants buy and sell securities around the world. In the US markets alone, investors trade billions of dollars in stocks and bonds each day. The new information buyers and sellers bring to the markets help set prices—and with each bit of new information, prices adjust accordingly. No one knows what the next bit of new information will be, as the future is uncertain. But we can accept current prices as fair. This doesn’t mean that a price is always right because there’s no way to prove that. But investors can accept the market price as the best estimate.
If you don’t believe that market prices are good estimates—if you believe that the market has it wrong, you are pitting your knowledge or hunches against the combined knowledge of thousands or millions of other market participants.
Focus On What You Can Control
To have a better investment experience, people should focus on the things they can control.
It starts with an advisor creating an investment plan based on market principles, informed by financial science, and tailored to a client’s specific needs and goals. Along the way, an advisor can help clients focus on actions that add investment value, such as managing expenses and portfolio turnover while maintaining broad diversification.
Equally important, an advisor can provide knowledge and encouragement to help investors stay disciplined through various market conditions.
After nearly 30 years of designing, implementing, and managing retirement plans specifically for physician practices, UPAL has the unique experience needed to help doctors with their retirement plan investing. If you’re a physician and you don’t already have a retirement plan for your practice or you want to assess how your existing plan is performing for you and your staff, call UPAL today for a no-cost analysis. We can be reached at 918-747-5585 or at email@example.com.Adapted from content developed by Dimensional Fund Advisors, a registered investment advisor uniquely managing assets for investors around the world since 1981.