Many people ask what are the most important issues in investing decisions.I am sure that there are different opinions about this question.For many years I have pondered over this issue. There are issues about risk and returns,about short term and long term horizons, about your age and time horizons, about stock and bond ratios, about mutual funds and index funds, the role of precious metals and emerging markets in your portfolios.
After many decades of trying to sort out all of these issues, I have finally arrived at the root of all investing issues.
I wished I had known these earlier ... I would have been both happier and wealthier.!!
These are the key to all investing decisions. It affects all decisions about risks and returns and most importantly it affects your peace of mind and your happiness.
All investing is about the future and the future is unpredictable. No amount of analysis can take into all the variables and come up with a dependable answer. It is a futile effort even to try to predict the course of future events. All the experts collect fat fees to tell you something that they do not know......they cannot know ... so do not beat up yourself if you do not know and make some bad choices.
It pains a lot more when we lose money, than the pleasure we get when we make money. Pleasure is a fleeting sensation,but the pain lives on for a long time. Based on this fact, most investment decisions should be based on minimizing the risk of losing money and not the maximizing the risk of making high returns.
Investments will always return to the mean. If you select quality investments and they over perform, it is a good reason to reduce your exposure in them ... take something off the table. If certain good investments have underperformed, put something more in them.
Normally most of us practice the opposite of these cardinal rules and end up with disappointing returns.
Over a 10 year period, the US stock market has returned about 7-8 percent (these returns include dividends, and price appreciation) however most individual investor returns have been below 3-5 percent.
Somehow the Mutual funds claim to give you better returns, but actual returns seem to be lower than they claim.
There are some people who seem to defy the laws of gravity in investing, but they are few and far between.
Most people who tell you to the contrary are either too optimistic or they have a selective memory.
Are there dependable ways to improve your performance track record and get reliable returns ? ... yes there are.
We will address some of these approaches in future articles.