Nancy Graham CPA, CA, CIM, CFP, TEP

Portfolio Manager
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In 2015, let's remember what we already know.

January 20, 2015 - 0 comments

In 2015, Let’s Remember What We Already Know

As we move into 2015, we inevitably look back at 2014 and its year-end stock market returns. When viewed close up, strong markets may tempt us to take more equity risk in our portfolios than we originally planned. For example, as of year-end 2014, the S&P 500 Index’s five-year compound returns of almost 14 percent provided a jet-assist to recent U.S. market performance, generating a temptation to load up on those energetic equities. But let’s remember what we already know: We're only human, tempted by our emotions when making investment decisions, so it’s important to view those recent returns through a clarifying lens of long-term strategy.

2014 Returns in the Eye of the Evidence-Based Beholder

Based on robust research into the interaction between capital markets and human behavior, we already know that we are emotionally wired to get it wrong. Studies have demonstrated that market-timing decisions like buying into a recently strong market aren’t expected to work out for us as investors. On the contrary, due to the increased costs involved in chasing last year’s returns (which hold no predictive powers over this year’s returns), market timing is expected to make you poorer, long before it will build your solid pension plan. As Jonathan Clements of The Wall Street Journal observed in his year-end column: “Despite the pundits’ stories, we simply do not know what will happen to stocks and bonds over the next year — which means you need to base your investment decisions on something else.”

Focused Investing

What’s that “something else”? Ignore recent successes in the market. Ignore the predictors and prognosticators. They don’t actually know what’s coming next. Instead, stay focused on the level of market risk you had decided to take with your money, risk you need to take based on your personal financial goals. Stay focused on being widely and globally diversified to manage the risks that you have decided to take on. Stay focused on managing your trading costs and taxes.

Remember, focusing on what you already know offers the best chance of building (and sustaining) a portfolio that can become your pension.

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