Investing Success or Investing Failure - It's All on You!

In this week’s ‘For your Consideration’ I submit another ‘top ten’ list. I enjoy lists! Shopping lists, tasks lists, agendas - They provide an easily obtainable feeling of accomplishment as you make your way through, crossing off your successful missions before tackling the next one. I like writing my submissions in list form to help compartmentalize subjects into bullet points of knowledge!


So for this month’s learning checklist, I am reviewing the top 10 variables that have the biggest impact on your portfolio’s long term rate of return. For better or worse, your rate of return is the most quantifiable aspect of financial planning. An interesting characteristic of this list is as follows: The higher the ranking of each variable the more control you (the investor) have on that element of investing. To summarize in advance, the point of this exercise is to show that you are in more control over your investing success than you might realize.


Tie 10/9.) Political Risk/Economic Policy


Maybe we have a little bit of control over political risk since we have the ability to vote in and vote out who serves. But unfortunately, we only have the ability to elect one group of people from one local or one nation. Also, once those folks are in office the policy that they decide to enact is entirely up to them, despite public opinion.


Health policy, economic policy, wars, trade; we are at the whim of legislative and executive decisions that will have some impact on the markets, if not immediate, certainly during the course of an economic cycle. Thankfully, given a long enough time horizon, these effects will be minimal. Yet, we still have to make it through the short term trials and tribulations, and there are times when the effects of these risks can be quite harsh.


8.) Corporate Decisions (Unsystematic Risk)


Unless you are on the board of a company you have almost no control over what that company does with its internal operations (despite shareholder voting and other investor rights). Each time earnings are reported, or scandals revealed, we have to watch as our investments go up or down without having any ability to alter or control the direction. Like political risk/economic policy, the effects of this risk should not be much of a burden to your long term rate of return.


7.) Short Term Speculators


Day Traders and speculators are those investors who have misguided (my opinion) goals to look for that slight edge to help them make a quick and easy fortune. I could dedicate multiple articles about my attitude towards stock speculation, market timing and technical analysis. It is my belief that market speculators are no different than gambling addicts, but with charts and graphs. Day traders, hedge funds, and uneducated investors sit at their keyboard hitting the ‘buy’ or ‘sell’ button with great vigor for reasons I won’t pretend to understand.


Speculators have the biggest impact on intraday prices and flash crashes. The cause of most newsworthy intraday gains or loses can be blamed directly on speculation, not logical reasoning. If your time horizon is 24 hours speculators can be your best friend or greatest enemy.


6.) What Assets You Invest In


I won't advocate that an individual has to spend hours investigating a company, or bond, or real estate investment, but you certainly should have a minimum of understanding of how your investments work, how the asset affects your portfolio and how it helps your long term financial goals. Investing in something because you heard it’s the next big thing is a very easy way to lose money. Know where your money is going and invest in a strategy, not a fad.


5.) Diversification


Thankfully, the effects of the above factors can all be minimized by diversifying your portfolio. Diversification is the strategy of spreading your funds out among various investments and asset classes. By doing this you're not exposing your total balance to one particular investment which can react very negatively to any one of the risks mentioned above. While you will occasionally pick a poor investment, if your funds are spread out among many dozens (if not hundreds) of other assets there will be minimal long term damage on your total balance.


4.) Using a Team of Advisers


Some of the most important people in your life won't just be your friends or family but also individuals that will help you create more resources and time to better enjoy your time with friends and family. Having a good Financial Advisor, Tax Advisor, Lawyer, Doctor, Auto Mechanic etc. will allow you to have a second set of eyes on various aspects of your life, in order to help you understand your options and make decisions that are truly in your best interest. Sometimes we don't have the ability to see our own faults, and having a professional team around us can help identify when we are doing something detrimental to ‘our plan’. Having advisers around to help you navigate through uncharted territories pays dividends over the long term.


3.) Investment Expenses


This variable is a simple math equation. In addition to having your team of advisers you also need the proper tools to help you accomplish your goals. In regards to investing, cheaper tools are better. In this age of technology and commoditize investing there is a lot of information and plenty of investment options. This has caused investment companies to lower the expense ratios of their investment in a bidding war for customers. If you are the type of investor who just wants the vanilla diversified portfolio you don’t need to pay for creativity or investment fads. Unless you have a specific interest in a specific or complex investment, simple and boring is the way to go and simple and boring is cheap. The power of compound interest does not ignore the additional rate of return you get by minimizing the output of expenses.


2.) Taxes


For most investors the biggest cost of investing is taxes. While taxes are unavoidable, it's very possible to have control over your total tax bill. By having tax-efficient accounts and the proper investments in each account (depending on the tax treatment of each asset) it is possible to control the delta between your pre-tax and post-tax rate of return. Additionally, maximizing your income (by having proper annual tax planning), can increase your earnings and the resources you have to fund your investment accounts. (Necessary disclaimer: see your tax professional about how to address my last point.)


1.) SELF DISCIPLINE!


I apologize for wasting your time with the first nine points. You could have skipped right to this section, because discipline is unequivocally the most influential variable on your investment returns. It is the aspect of financial planning where I provide the most value to my clients. Having a proper financial plan, and the fortitude to stick with it, will provide you with the greatest opportunity for investment success. Conversely, veering from your investment plan, selling at the wrong time, buying at the wrong time, (or even worst yet) trying to correct mistakes by chasing returns, can have negative effect on your returns forcing goals to be pushed out many years or abandoned altogether.


There is no get rich quick scheme. Long term successful investing is methodical and boring. It requires accepting the grind and sticking to it. Are your stocks up? Good, stay the course! Are your stocks down? Oh well, stay the course. Regardless of your current portfolio and account balance, if you don't need the money right away (and if you do then you shouldn't have the money invested) there are usually no changes that you need to make if your goals haven't changed.


Well that’s easy enough, right?? Now getting those desired returns should be no problem for anyone!


Maybe it’s not that easy, but at least you know you have more control than you might have thought. And being an investment expert isn’t so complex after all!

Blue Sky Financial Group
3478 Buskirk Ave. Suite 1000
Pleasant Hill, CA 94523
925.719.9297
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