The Secret to Investment Success

We all want to pick a winner. It doesn’t matter if we’re at the racetrack, casino, or investing our IRA. However, investors who spend most of their time trying to pick winners often end up losing more times than not. The number one determinant of your portfolio’s return is your asset allocation – the percentage of your investments in stocks and bonds – and not your superior stock picking ability or market timing. Once you have your asset allocation in place, your behavior will determine your long term success.

It’s easy to look back after a huge market run-up or downturn and think that it was obvious. It then becomes even easier to base our future decisions on recent events, by supporting our gut feeling by selectively looking at information that supports our opinion. We are constantly barraged with headlines that play to our emotions. The media loves to use current events to forecast the future. They want to create headlines that sell magazines or attract viewers, not create successful investors.

Steve Forbes said in a 2003 presentation to The Anderson School of Business, “You make more money selling advice than following it. It’s one of the things we count on in the magazine business – along with the short memory of our readers.”

And just how do investors do with all of the information available about how to pick the winners? Dalbar does an annual study of investor performance versus the indexes. Last year the average equity investor underperformed the S&P 500 by almost 4%. They were down 41.63% vs. a loss of 37.72% for the S&P. For the past 20 years (January, 1989- December, 2008) the average equity investor earned an annual return of 1.87% vs. the S&P 500 average annual return of 8.35%. On a $10,000 investment, this meant a difference of $35,240!

We cannot control the short term direction of the markets. However, if we focus on what we can control - our reaction to the market- our chance of success will be much greater. Author Nick Murray does a great job summing it up: “At the end of our investing lifetime, it won’t matter what your funds did, it’ll matter what you did. And what you did will be a pure function of the quality of advice you got – from one caring, competent (advisor), and not from any number of magazines.”

By Chris Carleton, CFP(r)