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The new year may be 2020, but that doesn't guarantee a perfect vision of the future. In fact, the best we can hope for is something like a cloudy, 20/1000 vision of the future. That is not to say I don't have a few predictions to make, as well as challenges to issue on having the conviction to be a smart investor. Here they are:
The bull market began March 9, 2009, and is now the longest in history. Yet we are not in a new paradigm where stocks go up forever, just as in 2009 we weren't in a new paradigm when many believed that the stock market would take decades to recover. Stocks will plunge far more than the 20 percent required for a bear market. I just don't know when, or by how much they will rise before this happens.
Have the conviction to understand emotionally what such a likely scenario could do to your financial independence. Consider taking some risk off the table by shifting to high quality bonds or bond funds. Then, when stocks do tank, buy those stocks back when they are on sale. Simple — yes. Easy — not so much.
When the financial services industry launches products such as new funds, it does what's called back-testing. The idea is to sell the consumer on how spectacularly these products worked in the past decade or two. But in the world of big data, it is child's play to run millions of scenarios to find strategies that worked in the past. Unfortunately, the vast majority will underperform the market going forward.
Have the conviction not to take the bait. These funds will come with brilliant marketing that will appeal to your emotions and make you believe this is a better market-besting way to invest. Low-cost broad index funds are likely to do far better.
Some will predict the great depression ahead or how to profit from the greatest boom in history. And sometimes it's the same person who makes these consistently wrong predictions.
Have the conviction to recognize that nobody has a stock market crystal ball that allows them to glimpse into its future, so investing based on the predictions of these gurus is hazardous to your wealth. If you are even thinking about following some guru's advice, take at least 10 minutes to do a simple internet search to see what others have said about his past predictions. Don't let these so-called financial prophets profit from your nest egg.
When stocks plunge, investors will move to cash and bonds. When stocks bounce back and set new highs, investors will dive back into stocks. If international stocks outpace U.S. stocks, everyone will suddenly embrace international investing.
Have the conviction to avoid the all too human instinct to chase past performance. Set an asset allocation target that meets your need and willingness to take risk, and stick to it. This means you must sell some of what has done well and buy what has performed poorly. It turns out that it's better to buy low and sell high than the predictably irrational reverse pitfall that many fall into.
The prospect of making a bunch of money fast can be exhilarating. But that excitement (along with expenses) is the enemy of the investor. Typically, that which is hot is quick to turn ice cold. A balanced portfolio of stock index funds and high-quality bond funds is far less exciting. You'll get even less excitement if you don't look at the performance very often (I'm still working on this one).
Have the conviction to get your excitement elsewhere. The late Nobel Prize-winning economist Paul Samuelson said, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
As we enter the new decade, remember that money gives the freedom to pursue whatever brings you happiness. Embracing these five convictions puts one on the right side of my predictions and on the right path to financial freedom and, hopefully, happiness.
Allan Roth is the founder of Wealth Logic, an hourly-based financial planning firm in Colorado Springs, Colorado. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.
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