The focus of every (real) successful investor
Do you want to know what the share market will do over the next 6-12 months? What about next few years or decades? Would you also like to find out about the property market, interest rates and political situation over next few months or years? Wouldn’t that make it easier to invest ? Well, most certainly not...and this is why.
We live in a timing and selection society where the main focus is always on (out)performance.
"Ordinary people don't concentrate on meeting their financial goals and instead they are in a race to outperform each other."
This is mainly caused by two things:
- all their investment decisions are driven by the media (tv, press, online)
- they never had a chance to sit down with a good financial coach
An action in the second point would also eliminate the first point. A good financial coach should be able to tell you that a portfolio (and its performance), unless it's a part of a plan, means nothing. If you want to meet your financial goals you need a financial plan.
A portfolio is certainly a very important element of a plan, but on its own it is not a plan. People with plans make it financially, people chasing performance as a substitute for planning, never make it financially.
I hope you can see it is a common sense that without a plan you surely will end up somewhere, you just might not like where...
The fact is that nobody can consistently predict future and performance. And if someone will claim to you they can, run and run fast!
For some reason, it doesn’t stop people from making predictions. Look it up... Open any financial/business section of newspapers, financial magazines, or listen to any ‘expert’ media financial commentaries and predictions. Most of them (with unbelievable certainty) talk about what they think is going to happen and how long it is going to take.
Looking at stories like these, married with a daily focus on the short term volatility and price movements and no wonder the general public is so confused and twisted in all directions when it comes to forming any opinion about investing.
We live in a timing and selection society where the main focus is always on (out)performance.
"Ordinary people don't concentrate on meeting their financial goals and instead they are in a race to outperform each other."
This is mainly caused by two things:
- all their investment decisions are driven by the media (tv, press, online)
- they never had a chance to sit down with a good financial coach
An action in the second point would also eliminate the first point. A good financial coach should be able to tell you that a portfolio (and its performance), unless it's a part of a plan, means nothing. If you want to meet your financial goals you need a financial plan.
A portfolio is certainly a very important element of a plan, but on its own it is not a plan. People with plans make it financially, people chasing performance as a substitute for planning, never make it financially.
I hope you can see it is a common sense that without a plan you surely will end up somewhere, you just might not like where...
The fact is that nobody can consistently predict future and performance. And if someone will claim to you they can, run and run fast!
For some reason, it doesn’t stop people from making predictions. Look it up... Open any financial/business section of newspapers, financial magazines, or listen to any ‘expert’ media financial commentaries and predictions. Most of them (with unbelievable certainty) talk about what they think is going to happen and how long it is going to take.
Looking at stories like these, married with a daily focus on the short term volatility and price movements and no wonder the general public is so confused and twisted in all directions when it comes to forming any opinion about investing.
The market is unpredictable. It moves up and down and sideways often for no apparent or logic reasons. And no one can consistently predict when it happens; how long it will continue to happen and when it will finish happening.
The same goes for the consistency of performance. No expert forecasters, no fund managers can guarantee or outperform in any continual way. Taking credit for when things work out well occasionally and feeling guilty when they don’t is equally foolish to say the very least.
If you want to be successful when it comes to investing you need to acknowledge and accept that the future cannot be predicted and your investments will not always be returning greatly. As well as no investments or investment managers can be a top performer every year. The sooner you accept this, the sooner you experience the liberation of this wonderful reality.
Once your mind will see the light you can be assured the good news does not end here. In fact, I have even more satisfying and liberating truth for you. The returns your investments produce are irrelevant when you look at the whole picture. The actual returns average people get have very little to do with the returns of the investments they invest in.
We humans are emotional and we act the same way. We are also competitive and greedy. And we certainly act that way too. It is reflected in investment decisions we make. Because these are emotional decisions, they are direct or indirect results of a 'reaction process'. Reacting in investing is in itself a serious mistake.
People make a sequence of all kinds of investment mistakes all the time. They range from under diversification, price chasing, speculating and trying to time the market to panicking thinking it’s the end of the world. The list goes on and on. These are very common but serious mistakes that create a gap between a published return of an average share fund and the real life return of an average investor. This gap is over 7 % per annum!*
Compound this over say 20 years and you will get a huge loss of wealth!
We humans are emotional and we act the same way. We are also competitive and greedy. And we certainly act that way too. It is reflected in investment decisions we make. Because these are emotional decisions, they are direct or indirect results of a 'reaction process'. Reacting in investing is in itself a serious mistake.
People make a sequence of all kinds of investment mistakes all the time. They range from under diversification, price chasing, speculating and trying to time the market to panicking thinking it’s the end of the world. The list goes on and on. These are very common but serious mistakes that create a gap between a published return of an average share fund and the real life return of an average investor. This gap is over 7 % per annum!*
Compound this over say 20 years and you will get a huge loss of wealth!
Average investor annualised returns compared to SP 500 for 1987-2007
*Dalbar Inc. The Measurement of Success. Quantitative Analysis of Investor Behaviour, 2008
The series of investment decisions average people make cause that they not only end up underperforming the market. They underperform their own investment! All that they would have to do in order to get the performance of their fund is to select a fund (doesn't matter what fund!) and hold it for 20 years.
As you can see we are suddenly so far from the market predictions, share market volatility, interest rates, past performance comparisons etc, they are so irrelevant...
The only important thing is how passionate and how persistent your financial coach is in managing your investment behaviour. By the way, you do need one. Please don’t think you can do it all yourself. There is a reason why even top athletes still need a coach.
If you allow them, they will predict and control your behaviour because this is all they can manage and because it is the dominant determinant that makes all the difference.
I hope you will remember this next time you see funds comparisons and ratings based on past performance in your favourite financial paper - the real investment outcomes are far more dependent on investor behaviour rather than published performance of a fun.
by Michal Bodi
The photo courtesy of freedigitalphotos and smarnad.