All of us like to find the highest rated or “best” of everything. I recently spent more time than expected searching online reviews for the “best” front pocket wallet. In our modern world, looking for the “best” is part of life. When it comes to finding the “best” investments, however, this well intended exercise can have dangerous consequences.
Whenever you search for a particular product or service online you generally start with certain characteristics. In my wallet example I knew it had to be leather, relatively small, and come in a variety of colors. Within the investment realm, if the one and only attribute you care about is return, then you likely will find investments that are far too risky, or otherwise ill-suited for your circumstances.
Here are 4 ways to find the best investments for your situation:
1. Start with the reason you are investing. What are you trying to accomplish? What is the timeframe? What are the constraints? It’s critically important to understand at the start that faster (think higher return) isn’t always “best”. Think about your car. It may indeed go 100 miles per hour or more but do you really want to drive at that speed? The “best” speed for your circumstances is likely much lower.
2. Take the free lunch. Nobel laureate Professor Harry Markowitz wrote more than 65 years ago that “diversification is the only free lunch” in investing. Diversification doesn’t guarantee that there won’t be volatility or even losses, but it does lessen the impact of wide swings among differing asset categories. Perhaps of even greater importance, diversification enables you to “stay in your seat” during turbulent market stretches.
3. Think Decades, not Days. It’s perfectly random (and equally meaningless) what happens in the stock market during any day, or for that matter any week or month. From 1980 to the present, the S&P 500 Index is only positive about 53% of the trading days. This positive percentage rises to about 74% of the calendar years during this 40-year swath of time. The entirety of our effort is to help clients stay with their plan through the noisy days so that they can benefit from the productive years. A long term perspective is needed to find (and maintain) the “best” investments.
4. Something new and shiny is always in the works. I have recently been watching Halt & Catch Fire on Netflix. This series is broadly about the heady early days of the personal computer industry in the 1980’s. Scores of IT engineers were constantly working to create the next “hot computer” but inevitably they would find that someone else had already made a computer faster, cheaper, and better. The same principle applies to investments. There are always hot new investments that create a stir, but these new investments very likely have no application for your circumstances. Part of finding the “best” investments is choosing low cost, well-diversified funds and staying put.
Many failed investors spend all their energy endlessly searching for the magic talisman, the “best” investments. The truth is, finding investments that fit your long-term planning strategy are the “best”.