Article Spotlight

 

In this series we analyze current financial articles and explain how the conclusions of the article relate to our investment strategy.

4 facts to never forget when investing

In our latest quarterly letter, we covered Empirical’s 10 steps to investment success. Today, we will take a look at a few of Larry Swedroe’s lessons for investors:

1. Maintaining a disciplined approach is key
2. Economic growth doesn’t always translate into stock market growth
3. Forecasts are best when they are ignored
4. Crises will occur over your investing life – plan accordingly

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1. Maintaining a disciplined approach is key

Mr. Swedroe illustrates why discipline is key by pointing to the fact that many investors who listened to “experts,” such as Bill Gross, lost out on returns when compared with sticking to their investment approach. In 2011, Mr. Gross said bond yields reached unsustainably low levels, which caused many people to decrease their exposure to United States debt. Since this time, rates have actually fallen even further, yielding a healthy return for those who stayed disciplined. It is best to develop a disciplined strategy built around your individual goals and circumstances, and not around fiscal or monetary predictions.

2. Economic growth doesn’t always translate into stock market growth

A common mistake by investors is to believe that countries with high growth also have high stock market returns. This is not always the case. Swedroe uses the example of China over the past five years. While China grew faster than the U.S. as measured by GDP growth, large cap stocks in the United States actually had higher returns than Chinese equities. Keep this lesson in mind the next time someone recommends you increase your portfolio exposure to a certain country based solely on its growth.

3. Forecasts are best when they are ignored

A point that we frequently try to convey in our communications is that economic or financial forecasting tends to be a useless endeavor. Swedroe takes readers back to Meredith Whitney’s statement about municipal bond defaults and Gross’s prediction of the “new normal” to illuminate how wrong forecasters can be. If you hear someone make a forecast, it is generally best to let it pass.

4. Crises will occur over your investing life – plan accordingly

The fourth lesson Swedroe highlights can be the hardest to grasp. Financial crises will happen. If we know forecasts are unreliable and crises do happen, the solution is to prepare for them as well as you can, and ride them out when they do occur. A good strategy during a time of financial turmoil is to ignore the news, or “noise,” and stick with your investment plan in the context of your goals and values.

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About Kenneth R. Smith

Ken is the Chief Executive Officer of Empirical Wealth Management. He holds an M.S. in financial analysis and is a Certified Financial Planner®.

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