Take Responsibility for Your Investment Returns

In these uncertain times for investors, there seems to be several catch phrases that continue to make sense to me.  The first one is still the King: “Buy Low and Sell High”.  It’s hard to believe but true: everyone understands and swears by the premise but few have the discipline to just do it.  The second one was made popular by Warren Buffett himself: “Don’t Buy Anything You Don’t Understand”.  Again, just plain common sense, if an investment is too complicated to understand, how do you know it will do well.  And I will offer a third piece of advice given to me by a client of mine this week.  She explained that she and her husband decided to “Take Responsibility for Investment Returns”.

Buy Low and Sell High

While this seems all too easy to put into play, the truth of the matter is that most investors have trouble in practice.  I was reading the results of recent research where during the past decade, a study by Morningstar shows what a terrible price investors pay for their decision making.  The average investor’s return trailed the average fund’s return by 1.5%. Investor psychologists have insisted that investors aren’t consciously trying to time the markets but that they rush into rising funds based on hype and greed then sell dropping funds based on bad news and fear.  So they buy high and sell low.  All you need to do to help this trend is to turn on the nightly news which is full of gloom & doom.

Don’t Buy Anything You Don’t Understand

During the market crash of 2008, so many were quick to blame the Wall St financiers for creating the smoke screen that led to the melt down of financial markets around the globe.  If we take a giant step back and apply a basic economic law to the find a true root cause of the issue: supply and demand, the commercial paper flap was driven by investor greed for higher returns on high-quality short-term investments.  As a result, investors stopped looking at what exactly they were buying and were only buying higher returns.  Around the globe an increased level of scrutiny has since turned up several important cases of fraud; Madoff, Stanford, Lacroix, etc… the list seems to go on and on.  Institutional investors, regular folk, rich people, those on a tight budget all affected by the same disease.  They bought investments without asking what they were spending their money on.  Come to think of it, would you buy a house or car that you did not understand?  Probably not!  Well, saving for your retirement should be considered a significant investment that costs more than a car and could help you live comfortably, like you home.

Take Responsibility for Investment Returns

So why talk about: Buy Low and Sell High and Don’t Buy Anything You Don’t Understand, because I firmly believe that every investor who wants to profit from their savings should Take Responsibility for their Investment Returns.

This responsibility will look different to each person yet it means that everyone should make an effort to understand their savings.

Back to the research results for a minute.  The recommendations from Morningstar’s study is as important as it is unsurprising. Choose your allocation to stock and bond funds based on your personal circumstances and tolerance for risk.  Take a look at the post to Determine Your Investor Profile for advice on how to make this work for you. Asset allocation has proven to deliver better results than relying on recommendations from the mass media or some guru that tells you what the market will do next. Stick to your asset allocation until your situation changes.

Your responsibility may be to ask questions.  Depending on Relationship With Your Investment Advisor you will ask about the investments recommended.

When choosing funds, don’t look just at past total returns. Consider a fund’s volatility, favour funds that have less fluctuations from fund families that, over time, beat their category averages and have stable rankings against their peers over 3, 5 and 10 year time periods.

Lastly, the standard proven advice for worried investors is the buy and hold strategy and to stop watching the stock market’s daily drama.

What do you do to take responsibilty for your results?

Author: Robert

image credit