3 Questions Investors Should Ask in 2017

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Dec 28, 2016 3:45:00 PM

and tagged Investing

Leave a comment

portfolio questionsI wrote this post a couple of years ago, but the ideas here still hold true. In some respects, they're even more apt now than they were then. As we approach the New Year, it's a good time to examine our portfolios (and our lives) and ask ourselves what we could be doing better. — Brad

A while back, I clicked on a link to a Forbes piece, 35 Questions That Will Change Your Life. I’m a sucker for this type of article, even though there’s usually not much there, but this time I was surprised. Many of the questions were original, provocative, and, frankly, difficult to answer without some serious introspection. Several of them are also particularly applicable to investing.

1. What are you pretending not to know?

This question speaks to the challenge of applying knowledge, rather than emotion, to investment decisions. For example, many people know that a diversified portfolio can be a key to long-term success, yet many still succumb to the urge to chase performance. I’ve heard from dozens of investors lately who want more exposure to U.S. stocks and less to international, since domestic names have done so well over the past couple of years. Although we know that the best time to buy is not after an extended run-up, the temptation is real.  

We typically pretend not to know something because it’s simply too painful to face—or because the consequences of knowing are worse than the consequences of pretending not to. In both cases, in investing, the pain of doing the right thing is, over time, much less than the cost of not doing so. We need to find a way to act on what we know rather than acting as if we don’t.

2. Why don’t you do the things you know you should be doing?

The secret to increasing your potential investing success is actually no secret: diversify and rebalance. That means you end up selling high, on average, and buying low. It can also mean getting out of investments that make you feel good and into ones that scare you. This alone explains why most of us don’t do what we should, as well as the current investor interest in U.S. stocks.

There are a couple of ways to take away the pain of making hard decisions:

  • Have someone else (i.e., a financial advisor) do it. 
  • Or, if you want to do it yourself, set rules and schedules. If you have rules, there is no decision; just follow them.

A similar rationale is at work in default savings and retirement plans, which take advantage of people’s laziness. If you have to opt in to retirement savings at work, you may never get around to it. If you instead have to opt out, you still might not get around to it, but you'll be saving as a default. You can set up systems like this for yourself—for instance, by using direct deposit to send part of your paycheck to a savings account rather than your checking account, where you'll be more tempted to spend it.

Make a one-time effort, and then use today’s laziness to your own future benefit.

3. Should you be focused on today or tomorrow?

You have to focus on both, and the ideas I outline above can help you maintain that balance. By putting your savings on auto-pilot, you’ve started to take care of tomorrow. By rebalancing automatically or on a rules-based system, you’ve created a framework that, for the most part, helps tomorrow take care of itself while you devote most of your attention to today—which is where it should be.

As I get older, I realize that what success I’ve had has been largely a matter of learning to work around my weaknesses and flaws, while taking advantage of my strengths. Particularly in matters of investing, we all share basic flaws—loss aversion, unwillingness to take gains, short time horizons—that limit our chances of success.

The questions here highlight how that damage is done and also point the way to reversing it, making your success over time much more likely.

  Subscribe to the Independent Market Observer

Upcoming Appearances

Tune in to CNBC's Squawk Box on Monday, November 27, at 6:15 A.M. ET to hear Brad talk about the markets. Check your local listings for availability.

5 Ways to Affiliate
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Subscribe via E-mail

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®