Why Should You Avoid Operating From A Market Outlook?

  By Seth Jentner
Seth Jentner

I read an article that intrigued me with the following statement: “Successful investors work from an investment philosophy rather than a market outlook.” Let’s pause and unpack this truth.

The world conspires to make investors believe that the essential question is:  “What is the market going to do?” An entire industry attempts to predict the future. Magazines, websites and diagnostic tools … information is now available in an instant on the internet.

In spite of all this information, the ability to consistently predict investments remains extremely difficult. Don’t misunderstand me. There are people who strike it big and walk away with wonderful returns. Unfortunately for every person who does, there are more who underperform the overall market and shoot themselves in the foot with permanent investment losses.

This lack of success produces two common responses:  either, “I’ll never invest my money in the market again” or “I’ll try a different market prognosticator.” The first response will sentence that investor to safely going broke in cash and fixed-income investments, which have little chance of producing real returns to offset taxes and inflation. The second response continues to seek elusive market predictions.

Is there a successful alternative? You bet there is. Rather than operating from a market outlook, the successful investor works from an investment philosophy. The serious investor adopts an investment philosophy that stands the test of time. Let me give you some food for thought designed to give you a successful investment experience:

  1. The safety of an investment can only be measured by its ability to give you the ability to purchase what you need over your lifetime.
  2. Over the past 85 years, a diversified stock portfolio has produced a real return that is double that of bonds. In terms of building real wealth over time, stocks are safer than bonds.
  3. If an investor is willing to accept the inevitable (but temporary) declines of a diversified stock portfolio, they can earn the long-term gains of the stock market.
  4. The only way one can be sure to capture all of the market’s permanent return is to ride out all the market’s temporary volatility.

To do this, we recommend global diversification using asset-class funds in both stock and bond investments. Only by combining both types of investments with broad diversification will most investors have the fortitude to remain fully invested in order to obtain long-term investment success.

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