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June 21 2013

Get Out Your Crystal Ball

Smart Money Blog

Many of you who have been to my office know that I have a crystal ball sitting in my conference room.  I have been carrying it around for 20 years, ever since I bought it in Puerto Vallarta, Mexico from a mysterious street vendor.

crystal ballI am sorry to say that all predictions from my crystal ball have never been right – but they have also never been wrong.

Experience has shown that even if you know what the Federal Reserve, Congress, oil prices, etc. will do, it is very difficult or impossible to predict the reaction of the markets.

The “market” is a representation of billions of individual decisions affecting trillions of transactions on a daily basis.  These decisions are based on fact, fiction and emotion.

What is an investor/saver to do?

First, do not get emotional.  Dalbar, a nationally recognized organization that analyzes investor results, identified three main causes of poor investment performance.  Psychological factors accounted for 45% to 55% of the shortfall.  In other words, your greatest obstacle for achieving your financial goals is staring at you when you look in the mirror.

Second, have a plan.  Unfortunately, the typical conversation when you meet with a broker or advisor goes like this:  “How much money do you have?”  “What is your rate of return?”  “I can do better.”

The higher the rate of return you reach for, the greater the risk of loss and the more likely you won’t achieve your financial goals.  Make sure you have a plan that allows you to target what return you need, and then build the most conservative portfolio you can to achieve your goals.

Third, make sure you have enough liquidity.  When we talk about liquidity, we’re referring to cash on hand.  This is important because you never know when an opportunity may present itself.  Again, paraphrasing from the Dalbar study, 35% of investor shortfall was a result of not having enough liquidity to meet obligations or to take advantage of opportunities.

If you would like a copy of the 2013 Dalbar study, please give our office a call at 215-968-1755 or fill out the contact form on this site and we will get back to you.

 

 

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Get Out Your Crystal Ball

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