If you spend a lot of time watching CNN, BNN or any of the other cable news networks that end in “NN,” you might come to the conclusion that, when it comes to investing, the only question worth asking is What Happens Next?
In the world of daily news, current events are king. That’s why they spend the majority of their time trying to forecast what’s going to happen tomorrow, next week, next month or – for those rare few who adopt a truly long-range perspective – next year.
The unspoken implication behind all this prognostication is that knowing the answer to this question is somehow actually important to you, your family and your financial independence. The subtext seems to be that, if you can just figure out what’s coming next, you can align your portfolio to take advantage of your foreknowledge and guarantee unending financial prosperity.
Unfortunately, no matter how much we might wish otherwise, the future will always be a complete mystery. If there’s anything the past has taught us, it’s that the future has a way of turning out in a manner that is completely different from what we expected. Trying to align your portfolio to anticipate this essentially unknowable outcome is a lot like placing your life savings on a craps table in Vegas.
Instead of asking what’s going to happen next, a better question might be: “is knowing the immediate future important or even relevant to my financial independence?” If the answer is no, then you can start ignoring all the conflicting voices from the cable news, and start enjoying the rest of your life.
In fact, for most successful investors, the importance of what’s going to happen in the financial markets over the next few months pales in comparison to questions like “how will my post-work portfolio stand up to 30 years of rising costs,” “what impact will the sale of my business in four years have on my finances” or “how can I remain fully engaged and productive throughout my retirement years?”
Unlike the relatively useless “what happens next,” these three questions can help you develop a plan that’s based on things you actually know and can do something about – namely, your own life, career and goals – rather than focusing on market events that are largely beyond your ability to predict or control.
In my own wealth management practice, one of the most useful exercises I recommend to my clients is to quantify their goals and objectives in a spreadsheet. Because they are specific and personal, goals like a particular retirement age, anticipated savings and income, plans for the kids’ education, inheritances, and downsizing or upsizing a home can all be calculated and anticipated with a relatively high degree of accuracy.
Once these numbers are laid out in an organized fashion, it often becomes obvious what investment strategies we should pursue in order to make sure they reach their preferred destination. A destination, I might add, that is unlikely to be impacted by whatever happens to the price of oil next month.
In my experience, investors who focus intently on current events tend to jump in and out of the market, repeatedly changing their asset allocations and experiencing costly tax events in a vain attempt to dodge paper losses. Unfortunately for these investors, their frantic efforts to “time the market” usually end up causing the very losses they’ve been working so hard to avoid.
The truth is, over the long run, the overall markets will outperform about 90 per cent of all active (or market timing) strategies if they are simply unmanaged and left to their own devices.
Take the S&P 500 as an example. At the time I am writing these words, this unmanaged index of the 500 largest companies in the U.S. is at 1,976. Thirty years ago it was at 150 points. Thirty years before that it was at 22. The market, as reflected in the S&P 500, will take care of getting you a good return, if you just leave it alone and give it enough time.
So the next time you find yourself trying to anticipate where the market is headed, turn off the TV, and spend a little quality time instead thinking about the questions you can actually answer.
Enlist the help of a competent advisor. Figure out your objectives. Quantify them, and then put them into a long-term plan that is benchmarked against the only index that’s really important: your own life and goals.
Once you have your goals quantified and a plan laid out, you will find it much easier – and much less stressful – to figure out an asset mix, cash flow and savings strategy that will help you put your plan into action.
And the next time the talking heads on your television start telling you what’s coming around the next financial corner – turn the channel.
There must be an I Love Lucy rerun on somewhere.
Alan MacDonald is an investment advisor with Richardson GMP Limited. Alan helps investors with over $500,000. of assets make smart decisions about money. He is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.
All material by Alan MacDonald. Alan MacDonald is an Investment Advisor at Richardson GMP Limited. The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates.
Richardson GMP Limited, Member Canadian Investor Protection Fund.
Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.
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