Last week, I talked about how markets do what markets do. You can’t predict it and you can’t control it. If you invest in the markets, you have to accept this reality and realize that over time, you will win.
I always find it amazing how many people try to figure out why markets to what markets do and in turn try to determine where it is going to go in the future. Just watch ROB TV for a day and you will see what I mean. I believe the market is unpredictable because it is simply a place where buyers and sellers converge. When there are more buyers than sellers, prices increase. When there are more sellers than buyers, prices drop. Why people buy and sell is just a big guessing game.
Ask anyone who is successful in life and they will tell you that success comes in focusing your energy on things you can control as opposed to things you can’t. Unfortunately, people expend too much energy worrying about things they can’t control.
What about investing can you control?
If you can’t control the stock market, what can you control?
1. Risk. When it comes to investing, risk determines performance and not the other way around. Investors tend to focus more time on performance than risk. And why not? After all, the basic goal of investing is to make money.
How can you control risk? Risk is controlled through asset allocation and diversification. You see, it you don’t like the risk of the market, then you control that risk by putting some of your money in other things that don’t react the same way markets do. Asset allocation is an old science.
If you are worried about what markets are doing to your portfolio, then it might be a good time to take stock and see how much of your portfolio is exposed to the stock market. I’ve met people, for example who are surprised that they had 100% of their money in the stock market.
2. Your financial planning. So many people go see financial advisors to get help with their investment planning. I’ve always said that instead of focusing on investment planning. People should spend more of their time focusing on their financial planning. I believe good financial planning can make you 10%,20%, 30% or more. Good Investment planning might get you am extra 1%, 2%, 3%, etc.
When it comes to your portfolio, big picture financial planning helps people to figure out how much risk they need to take as opposed to how much risk they want to take. You see, that’s the big problem with risk. When it comes to your risk tolerance, it’s all subjective. Think about it, when markets are strong, you probably feel like most, it’s easy to take a little more risk in your portfolio. On the other hand, when markets are down, you probably instinctively want to be more conservative. Risk tolerance becomes a moving benchmark. I think the industry needs to do a better job understanding the risk investors need to take as opposed to what they want to take. If the risk they want always changes, let’s figure out how much risk they NEED to take.
3. Your research. Most people do little to no research on investments. For those that do some research, most of it is one dimensional – a focus on past returns.
Saving and spending – To build wealth, it matters less what you invest in and more on how much you invest.