By Rene Bruer
I’ve always admired the pioneering and enterprising American spirit. Consider the original pioneers who risked injury and death by leaving Independence, Missouri, and heading west on the Oregon Trail in 1841. This group of brave families took on a grueling journey in the hope of a better life but the mountain paths they took consumed precious human lives. Their sacrifice ultimately “paved the way” for thousands of others to make the journey by way of smaller and lighter wagon trains with less loss of life. By 1884, Union Pacific constructed a railway along the route which made travel safer, more economical and certainly more prevalent. Today, the western United States is home to Silicon Valley in California and Microsoft and Amazon, both headquartered in Washington State. We have all benefited from the risks taken by those brave individuals.
That pioneering and enterprising spirt is alive and well with investors today. I admire folks who invest on their own and there is anecdotal evidence of a select few amassing large fortunes over decades of disciplined investing. While not physically risking their lives like the pioneers, investors certainly put their personal treasuries at risk when investing in the financial markets at the hope of making more than they put in.
Unfortunately, empirical evidence and data on do-it-yourself investing does not support going it alone. The publicly available Dalbar Quantitative Analysis of Investor Behavior (QAIB) studied investor results compared to their relative indices and showed the following:
Despite innovations in the financial services industry like index funds, evidence-based investing, and low-cost trading, investors continue to take the treacherous paths when attempting to make money. My team and I have seen this over the years when evaluating account statements from do-it-yourself investors where the same mistakes are made over and over again. Here are some of the common themes:
- Lack of diversification
- Incompatible risk-taking compared to actual risk tolerance
- Excessive trading
- Unsuccessful attempts at market timing
- Incomplete and insufficient research
- Negative tax implications
All of this leads to inferior results over the long-term, just like the Dalbar study proves. So what is the path (or railroad) that investors can take to have a better investing experience? Here are some ideas:
- Establish your goals
- Know your priorities
- Evaluate risk tolerance
- Research your investments
- Don’t time the market; it doesn’t work
- Diversify, diversify, diversify
- Did I mention to diversify
- Keep your costs low
- Limit the amount of trading that you do
- Invest with discipline and confidence
If you see this list and say to yourself “you know what, I think I need to hire a professional to help me,” there are qualified advisors who can help you. Start by going to the National Association of Personal Financial Advisors website (www.napfa.org). NAFPA advisors are fiduciaries (they work in the client’s best interest) and operate under the fee-only model (they do not take commissions and are only paid by their clients). If you find a NAPFA advisor that is in your area or are referred to one, ask them about their investing philosophy and the services that they may provide above and beyond investing, such as tax management, estate planning and insurance counseling.
The railroad tracks of a successful investment journey have already been laid; it does not have to be treacherous. You can choose to follow the path forged by others and empower yourself by meeting your goals.
Smith Bruer Advisors is a fee-only, fiduciary Registered Investment Adviser