Investing is Boring

I came across an article in the Financial Post that I thought was worth sharing.  The article was titled Investing is Boring: If You Want Excitement, Go to Vegas.

The entire article is well worth reading but I particularly liked the following quote:  "timing the market is impossible, forecasts are for the gullible, and stock-picking is a mug’s game."

Time to Re-assess Market Risks/Rewards?

According to Jim Parker, Vice President, DFA Australia Limited, understanding investment risk begins with accepting that “the market itself has already done a lot of the worrying for you.” As Parker notes, “Markets are highly competitive, which means that new information is quickly built into prices. Instead of trying to second guess the market, you work with it and take the rewards that are on offer.”

To put yourself in the best position to “take the rewards,” it’s wise to work with an advisor to build a diversified portfolio designed to meet your long-term goals – and meet periodically to review your progress and make necessary changes to ensure you are still on course.

If the Great Recession has altered your perception of risk, now may be a good time to meet to re-assess your risk tolerance. Remember, how much risk you decide to take involves assessing three inter-related factors: your future goals; your age and investment time horizon; and additional personal factors such as your current net worth and natural temperament.

As you consider where you fit in the risk spectrum, remind yourself of the Catch 22 inherent in the risk and return equation. That is, while Merriam-Webster’s Collegiate Dictionary defines risk as “possible loss or injury,” risk also is present in opportunities that will be lost if you totally avoid risk. The simple truth, according to Parker, is: “If there were no risk, there would be no return.” Your chances of getting the balance just right are much greater if you work with a financial advisor who combines what Parker refers to as the “accumulated knowledge of financial science” with in-depth knowledge about you.

Decisions, Decisions

In Which Risks Are Worth Taking Jim Parker, a vice president at Dimensional Fund Advisors, writes, “Even the most self-declared risk-averse people take risks every day.” Parker notes that routine risks to our safety include crossing the road, exercising at the gym, choosing lunch and using electrical equipment. He adds, “There are the big decisions like selecting a degree course, choosing a career, finding a life partner, buying a house and having children. These are all risky decisions, all uncertain, all involving an element of fate.”

In making these decisions, Parker says we seek to “ameliorate risk by carefully weighing up alternatives, researching the market, judging possible consequences and balancing what feels right emotionally and intellectually, both in the short term and in the long.”

New research from Harvard Business School’s Michael Norton addresses how managers making decisions often err in one of two directions—either overanalyzing a situation or ignoring helpful information to go with their gut. More specifically, when deciding among potential products or employees, managers routinely take too much time considering all the attributes of their choices—even attributes that are irrelevant. Equally troublesome, their fear of the decision paralysis that can occur when evaluating too much information, often cause managers to decide to trust their instincts.

In an article discussing Norton’s finding, a sentence Dr. Seuss might have written caught my eye: “We know that sometimes people think too much, and sometimes they think too little. But we still don't know the right amount to think.”

I suggest that when it comes to financial decisions, it’s always wise to have a trusted financial advisor in your corner who understands the tradeoff between risk and return and how to build a portfolio that suits your risk tolerance level. A financial advisor can help you think and make solid decisions, giving you the best chance of achieving your goals.

Parker also believes investors need help making financial decisions about risk. “Advisors,” he writes, “help us take an objective assessment of the potential risks and rewards of various alternatives, by taking a holistic view of our circumstances and by keeping us free of distraction and focused on our original goals.”

I couldn’t agree more. Invest without the help of an advisor and you may be exposing yourself to unnecessary risks -- whether you’ve thought long and hard about your decision, or just gone with your gut.

Dimensional Stories: People Putting Ideas Into Practice

Someone recently asked me for information about the story of Dimensional Fund Advisors.  I recalled this video and provided a link to it. I enjoyed watching the video again and decided I should share it on my blog.  I hope you find it informative.

If you have questions about Dimensional Fund Advisors, you should consult with your independent registered investment advisory firm.



If you want to see a bigger version of this video, click on this link.  Click Here>>

Disclaimer: This video contains the opinions of the participants but not necessarily Dimensional Fund Advisors, DFA Securities LLC, or Bernhardt Wealth Management, Inc., and do not represent a recommendation of any particular security, strategy or investment product. The participants' opinions are subject to change without notice. Information discussed in the videos has been obtained from sources believed to be reliable, but is not guaranteed. These videos are made available for educational purposes only and should not be considered investment advice or an offer of any security for sale. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.