Always be skeptical, focused, fact-based, cost-conscious and diversified.
- After 30 years in business and after years as a NASD arbiter, I’ve learned a several key lessons that I use every day in my practice.
- Successful investors always maintain a healthy level of skepticism; they don’t rely on hunches and keep a close eye on costs.
- Great investors and their advisors stay disciplined and focused in all market climates and never put too many eggs in one basket.
- If an investment opportunity looks too good to be true, then it probably is.
This summer marks my 30th year of helping individuals, institutions and non-profit organizations by bringing clarity to their financial decision-making. I’ve had the good fortune of learning from a broad range of successful investors ranging from individual clients to Nobel Prize winning economists.
One of my best learning experiences occurred in the late 1990s and early 2000s when I served as an arbitrator on a three judge panel for the National Association of Securities Dealers (NASD). At the time, NASD was the regulatory body that oversaw stockbrokers. When someone had a dispute with their stockbroker and took them to arbitration—that’s usually what happens instead of a lawsuit– there was a possibility that I would be selected to hear the case.
During that period, I sat on panels for many cases, so I was able to learn many valuable lessons about what can go wrong the investment process without actually having to experience those lessons myself.
Top 5 lessons for investors
Here are the most important lessons I have learned during my career–lessons that I apply every day to my work and client relationships:
1. Be skeptical. A healthy dose of skepticism has saved many smart investors from being snared in an opportunity that turned out to be too good to be true. Risk and reward are joined at the hip. You can’t expect a higher return without taking more risk. But that doesn’t mean you should be reckless with your hard-earned wealth. Do your homework first before making risky investments and always run the opportunities past your advisor first. Simple as that.
2. Focus on your costs. Costs such as loads, management fees, marketing expenses and hurdle rates are one of the things you really can control in the investment process. Make sure you understand all of the costs pertaining to an investment you’re considering. If something’s not clear—or seems to be too high—it probably is.
3. Rely on evidence not hunches. If there is no rational economic reason to expect incremental returns from your investment strategy and no statistically significant evidence to support the strategy, then look elsewhere. A good understanding of statistics is an investor’s best tool.
4. Be disciplined. Keeping your cool at all times is the key to the investment kingdom. Make sure that your investment philosophy gives you the confidence to weather good times and bad. If you have a tendency to overhaul your investment strategy every time the markets change, then you need to adjust with your approach. “Staying the course” will help you reduce your stress level a ton, and will probably result in better returns.
5. Be Diversified. There is no free lunch. However, you can get really close to a free lunch through diversification. No matter what your circumstances, you want to have a portfolio that’s broadly diversified around the world. While your exact allocation should be matched with your goals, each asset class should be broadly diversified. This is an area in which advisors can be especially helpful.
I hope that these lessons prove as helpful to you as they have been to me over the years. If you have questions about any of these lessons, please don’t hesitate to contact me or visit the resources section of the Independence Advisors website.