LITTLE KNOW INVESTING SECRETS: Part 2-PREDICTIONS ARE USUALLY WRONG

By in Investing | 5 comments

Category: Investing

“Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window.”
Peter Drucker

It doesn’t get any clearer than that! The only one I know who can reliably predict the future is Patricia Arquette, the lead actress in the TV show Medium. Unfortunately for me, she is not a real medium, but an actor!

MAIN TOPIC

I can’t tell you how many predictions I receive for the annual performance of stocks, bonds, TIPs (Treasury Inflation-Protected Securities), or the dollar. I used to read those predictions religiously, because, of course, I thought they would give me a leg up on the competition. After all, I’m sure I was the only portfolio manager reading them (or at least one of thousands of portfolio managers)!

Then I had an epiphany, if Warren Buffet says that he doesn’t worry about the future direction of the market, and I know I’m not smarter than he is, then why should I. NOW, I save myself some time. When I see a prediction headline, I RUN as fast as I can. And save my attention for something that is REALLY important.

Investing is NEVER about tweaking your investments to follow the current trends. There is a lot of evidence that frequent trading actually leads to LOWER INVESTMENT RETURNS.

Investing Success is Very Simple

Start EARLY, or NOW (if it’s not early)

Contribute to your investment account(s) regularly

Invest according to your ability to handle volatility (RISK)

Get on with your life

PRACTICAL APPLICATION

Forget about predictions for the future. Start by contributing to your tax deferred retirement account at work (401K or 403B). Put in as much money as you possibly can. For now, put half into a broad world index fund and the other half into a broad bond index fund; get ideas here.  Don’t worry; you can always adjust the amounts later. Just get started NOW.

Investments go up and down. As long as you are patient and can leave your investment dollars in place 10 years or more, it is likely you will have more money than you started with.

Take a look at Sarah:

From ages 25 to 35 she invested $2,000 per year in a world stock index fund.

That’s a total of $20,000

Then she stopped investing.

When she reached 65 she had $439,000 from an initial investment of $20,000

During those 40 years, her investment went up and down, but she sat tight and reinvested her dividends. At the end of 40 years, she calculated that her annual return was 9%/year, just like the 100 year historical return for the stock market.

 Just so you don’t sue me, let me state that “PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.”

 But I can guarantee that if you don’t invest anything NOW, you definitely won’t have anything saved for your future!

Next time you hear a prediction about the future, be sure and ask yourself how the pundit knows what the future will hold!

ACTION STEPS:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it for all of your personal finance goals, thoughts, activities, and plans.

Go to your benefits department at work and ask to speak with someone about the retirement investments. If they offer Vanguard or TIAA-CREF, start there, since those companies are non-profit!

Read up on Index Funds here.

    5 Comments

  1. Of course,the key to Sarah’s success was that she also reinvested those dividends – as opposed to cashing the checks and spending them on a night on the town once each quarter!

    Yes? Give me some love, Barb! 😉

    All the best,

    Len
    Len Penzo dot Com

    Len Penzo

    April 23, 2010

  2. Letting the money ride for the long-term is the only sure way to build wealth.
    What about DRIPS Len? Would it matter if the dividends are invested in different stocks.

    LeanLifeCoach

    April 24, 2010

  3. @LenPenzo, You are ABSOLUTELY RIGHT- reinvesting (not spending) the dividends is all about making that money grow! You are a really smart guy! @LeanLifeCoach-Welcome, I’m happy to have you visit-DRIPS are Great. The determination of return on reinvestment is always the growth of the subsequent investment, so in short-reinvesting in different stocks is great, as long as the majority of those stocks continue to grow.

    Barb

    April 25, 2010

  4. I think DRIPs are great too. I am not sure all companies offer them though.

    Len Penzo

    April 26, 2010

  5. @Len-You are correct, not all companies offer drips (dividend reinvestment plans), but one can find out if they are available in the “investor relations” department of a company.

    Barb

    May 16, 2010

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