Happy New Year from MPM Wealth Advisors!
In the spirit of the New Year, we are sharing the Investment Resolutions we ask all clients to agree to. They are aligned with our evidence-based investment philosophy, and we think they make for a better investing experience.
- I will not confuse entertainment with advice. I will acknowledge the financial media is in the entertainment business and their message can compromise my long-term focus and discipline, leading me to make poor investment decisions. If necessary, I will turn off CNBC.
- I will stop searching for tomorrow’s star money manager, as there are no gurus. Capitalism will be my guru, because with capitalism there is a positive expected return on capital. And for me to succeed, someone else doesn’t have to fail.
- I will not invest based on a forecast-whether it is mine or anyone else’s. I will recognize that the urge to form an opinion will never go away, but I won’t act on it because no one can repeatedly predict the future. The future is, by definition, uncertain.
- I will keep a long-term perspective and appropriately consider my investment horizon (i.e. how long my portfolio is to be invested) when determining my performance horizon (i.e. the time frame I use to evaluate my results).
- I will adhere to my plan and continue to “rebalance” (systematically buy more of what hasn’t done well recently) rather than “unbalance” (buying more of what’s hot).
- I will not focus my portfolio in a few securities, or even a few asset classes, as diversification remains the closest thing to a free lunch.
- I will ensure my portfolio is appropriate for my goals and objectives while only taking risks worth taking.
- I will manage my emotions by learning about and acknowledging the biases and cognitive errors that influence my behavior.
The Resolution Rationale
We tend to buy stocks and bonds once prices have risen, because we feel comfortable and confident when markets are up. Similarly, when markets experience a downturn, fear sets in and we are often quick to sell. This can result in buying at or near market highs and selling at or near market lows, thus failing to capture a return. This is what we call the emotional cycle of investing and how it can cause us to make pricey mistakes.
Sources: Goldie, Daniel C., and Gordon S. Murray. The Investment Answer, optionalalpha.com