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Why Investment Clubs Are Failing

Seth Jentner07/30/2014

I read an interesting article in the Wall Street journal called, “Fun Fades at Investing Clubs.”

Apparently many investment clubs are suffering, even disappearing. The Journal article attributed this to “a deep shift in investor psychology.” Apparently, the fun is over.  The mood has changed over the past decade. People are quitting.

An investment club organizer was quoted as saying, “It is quite frustrating to try to preach that long-term investing really pays off, when it just hasn’t over the past decade.” Really?  Over the past 10 years, the DJIA stock index has increased by almost 75%.

In 1995, Arthur Ziekel, the then head of Merrill Lynch Asset Management, wrote a letter to his daughter about investing.  In this letter, he wrote, “Personal portfolio management is not a competitive sport.” He went on to write, “Good investment management practices … [require] discipline, patience, and consistency of application.”

I agree. Let me give you my take on why investment clubs are struggling. The markets have been volatile. The future is uncertain. People simply feel they just can’t tolerate the uncertainty anymore.

However, by focusing on the risk of losing money, people end up paying a premium for perceived safety and miss the opportunities for upside returns in the markets. Also, by trying to time when to buy what, would-be investors end up with disappointing results. This has been true throughout history. People end up with insufficient funds for their retirement.

Risk and return are interrelated. Diversify. Although stocks beat bonds over time, most people do not have the risk tolerance to invest 100% in stocks. Develop an appropriate investment allocation to help you weather the inevitable storms, and obtain a long-term meaningful investment return. Get help from a trusted advisor who understands these principles and who is not just trying to sell you something.

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