Dear S&B: I have been unsuccessfully trying different stock & mutual fund trading
techniques, what is the best way to find the winners? Jeremy – Santa Barbara
People have long tried to take the “risk” out of investing by coming up with strategies, theory and ideas on how to zig and zag the market forces. And why not, who would not want all the upside without the loses or risks?
The problem is that you are going up against nearly a century worth of Nobel laureate research explaining why it is nearly impossible for you to get what you want…all the returns with little risk. With billions of shares of stock trading around the world everyday, it’s hard to argue that the price of a security is not reflective of an efficient market. Unless you are a Congressman or Senator, what information do you know legally about a security that everyone else does not?
The premise is that the price of a security reflects all known information and risks at any given point in time. If the stock trades “cheaply,” there is an inherent belief that it does so for a reason…there is a higher level of risk and uncertainty. One could argue that an “expensive” stock is also very risky because it is overpriced but is it? Or does the price reflect future expectations by the market at large?
Let’s make this really simple…the risk free rate for investing is about 2% (the 10 year Treasury yield). If you want a higher return than that, you have to assume risks. You either have to lock up your money longer or take uncertainty with whatever you invest in.
Now there are all types of gradients, you don’t have to take on exceptional risks. But it is highly improbable that you receive extraordinary returns with the assumption of low risk. So we know you are searching for that magic formula because with all the really “smart” people out there, someone has figured it out? Ask the billionaire Corzine who risked it all on a Greece bond bailout play how that is working out…not so good.
The problem is that if high returns were that easy, the “system” would no longer work. And if someone has the holy grail of investing, why are they sharing it with you? Why not keep the secret to themselves or the trading strategy so it is not ruined? And if they had the slam dunk system, are they giving it away cheaply in the goodness of their heart or do they charge a ton for it and thus wipe out the excess?
If you really want to make sustainable wealth that funds your lifestyle for the remainder of your life, here is the secrete (you are warned in advance, it’s kind of boring):
Wealth Management: You save as much money as you can when you are young. If you are starting later in life, you have to assume higher investment risks if you are behind the savings curve. But this makes sense as people who were able to save when they were younger were able to assume higher risks at that time…so it translates as well later in life where you have to assume the risks to make it up. There really is no free lunch.
Tax Management: You employ tax saving techniques in conjunction with your CPA and financial advisors to help you keep more of what you make. These usually come in the form of home ownership, Roth IRA accounts, pre-tax company retirement plans, 529 education accounts, investment tax harvesting, etc. Investment Management: How much risk do you want to assume? It’s pretty much that simple. Over “time” it has long been argued and shown to be the case that you are rewarded for taking risks (over time). That makes sense because if you were not rewarded, then you would never assume the risks in the first place. The fallacy exists where people constantly try to gain substantial returns with the belief of little risk because they “know” the stock, they “know” the fund manager and the worst one of all, “great track record.” If you are disagreement with this, you better bring the research to back it up because this has historically been the case. Not the “smoke and mirrors” commonplace in the financial industry.
Risk Management: Life is full of surprises and uncertainty. Consider using part of your savings to protect your most valuable asset, you. That means life and disability insurance to protect your earnings ability. Long term care insurance to protect all you saved. Property insurance to cover losses or liabilities claimed against you.
Time, inflation, savings and diversification are normally your investment friends. The key word here is “time.” If that is not on your side and you have to make up for past mistakes, then you are forced to assume higher risks, work longer, save more or modify the life goals.
Author’s Note: Brad Stark, MS, CFP®, AAMS, CMFC and Seth Streeter, MS, CFP® are Co-Founders of Mission Wealth Management, LLC (MWM), a Registered Investment Adviser. The information contained in this article is general in nature and should not be construed as comprehensive financial, tax, or legal advice. The views expressed herein are not endorsed by National Planning Corporation (NPC). As with any financial or legal matter, consult your qualified securities, tax, or legal representative before taking action. Advisory services offered through MWM. Securities offered through NPC, Member FINRA/SIPC. NPC and MWM are separate and unrelated entities. Certain statements contained within may be forward-looking statements, including but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties; all statements are subject to change without notice. Diversification cannot ensure a profit or protect against loss. Also, historical performance cannot predict future results. If you have any questions you want addressed, please submit them to firstname.lastname@example.org.