investing: the name of the game

When I first meet with clients, they often have very particular views on investing, generally coming from what they’ve heard all their lives. “It’s all about beating the market, maximizing the return on investment.” “Buy what you know.” “I need to make my portfolio more conservative as I retire.” “We need to invest in gold because of the administration’s fiscal policy.” And you’ve got shows like Mad Money which seem to promise that you can always make money, if you just buy and sell the right stock at the right time. I’m constantly reminded of how much misinformation (or partially-true or out-of-context information) is out there, and the Internet hasn’t really helped that much. Hence, this blog.

So let me address that first one: “beating the market”. I hear that all the time, and I wonder if people even know what that means. What market? The S&P500 — 500 of the largest US companies? Or the Russell 1000? Or the Russell 2000? Or the MSCI EAFE index, an index of companies Europe, Australia, and the Far East? Or all of those? What about the bond market?

Point being: sure, I could beat the S&P500 over the long term, simply by investing in a riskier-but-more-rewarding market. But that would involve taking on more risk. Is that what you want? Or are you saying that you want the most reward for a given amount of risk, or vice-versa? Now you’re starting to ask the right questions — and they’re questions that will vary from person to person!

And that is what investing is “all about”: quite simply, determining the return you desire and/or the risk you require, and then determining what combination of investments will give you the best combination of the two. That’s it.

And before you can do that, you need to figure out what your investments are for. It’s vitally important and many investors don’t do it! Are your investments for retirement? A legacy? Saving for a house? An emergency fund? This will have a massive influence on how you invest! If you might need the money next month, why on earth would you invest it in the emerging stock market, which could get cut in half next week? And if you’ll need the money thirty years from now, why on earth would you invest in short-term bonds, where inflation would eat your returns alive?

Let me be clear: I don’t care how smart your broker is. If your investments are risky — stocks, junk bonds, etc. — then your investments are going to occasionally take a dip, along with the market. That’s just how it is. A really smart broker may be able to swing the needle a little bit, but they’re never going to time the market perfectly so as to always make money every day.

So: forget what Jim Cramer says. Don’t worry about which stocks to buy or sell NOW. Think about what your goals are, put together a portfolio (or portfolios) that make sense for those goals, and rest easy. And for God’s sake, turn off CNBC.