Amusement park rides typically fall into two categories: roller coasters and rides you nap on. Investing should be like the latter, but more often than not it ends up being a roller coaster of nauseating turns that make you wish you’d skipped the funnel cake.
It’s not meant to be complicated – let alone nauseating – and yet, with the plethora of investment options available to us today, investing often becomes a dizzying process.
“There’s an old saying in investing that the problem is not in stocks or in stars, but in ourselves,” says Trip Miller, managing partner Gullane Capital Partners in Memphis, Tennessee.
As investors, we often get in our own way by overcomplicating the investing process. It happens most when people don’t have a core investing strategy to guide them. “Because when things go down – and the market will go down, probably for a reason none of us could predict – you need a philosophy” to remind you why you’re invested the way you are, Miller says.
Consolidate your accounts.
One way many investors overcomplicate investing is by having too many accounts or investments, says Bill Van Sant, senior vice president and managing director at Univest Wealth Management in Souderton, Pennsylvania. A portfolio with too many moving parts can be difficult to track. Consolidating your accounts under a single financial provider allows you to view your portfolio in one place. It may also be the case that less is more where your investments are concerned.
There is a misconception that the more investments you have, the more diversified you are. Miller calls this over-diversification “worse-ification,” or owning too many assets that are fundamentally the same. He’ll look at his clients’ portfolios and see the same underlying security in six of their funds. Diversification works better with fewer investments in different sectors rather than dozens of funds whose holdings are easier to inadvertently overlap.
Simple doesn’t have to mean only index funds.
You can still invest in individual companies without getting overly complicated, Miller says. Investors can focus on three primary resources to determine if a company is a good investment prospect:
- Check the balance sheet to verify the company’s liquid assets exceed its obligations and that it’s generating more cash than what it sends on physical assets, known as its free cash flow.
- Look at the price-earnings ratio, or P/E, on a financial website listing the stock. The P/E ratio measures how much you’d need to invest to get $1 of the company’s earnings. A lower P/E means each dollar you invest is worth more earnings, so look for a company P/E below the market average.
- Miller likes owner-operated businesses because this helps ensure management’s interests are aligned with shareholders’ interests.
After reviewing all of these things, you can determine what you think the company is worth. If it’s trading at a price below your valuation and it fits your investment goals, you’ve found a winner.
Stop trying to time the market.
Be wary of over-investing in a company you think is poised to outperform, though, says Michelle Brownstein, vice president of private client services at Personal Capital in San Francisco. This is often an emotional decision, even if you feel it’s backed by data or special insights. Believing they know something other people don’t can lead investors to pursue complicated strategies that seldom work, such as trying to time the market.
Market timing goes back to the days when the same information wasn’t readily available to everyone. For example, brokers used to have access to research the average investor did not. Today, your broker better not have access to secret information lest she violate insider trading laws.
It’s completely unnecessary to believe you can develop secret information that’s going to give you an advantage.
Ignore the investment noise.
If anything, the issue today is having too much information readily available. “With all the data flow out there now, people are getting hit from so many different sources to ‘buy this, sell this, do that,'” Van Sant says. It’s enough to turn even the most disciplined investor around.
Adam Breazeale, a certified financial planner and financial advisor in Nashville, Tennessee, has seen this repeatedly with his own clients. He uses the example of a recently retired couple who initially agreed a 10 percent decline in their portfolio would be well within their comfort zone. But when the markets declined 10 percent, they called Breazeale wanting to sell even though their portfolio was down less than 2 percent at the time.
“They were convinced from watching the news that they must take some sort of action,” Breazeale says. Two months later the Dow Jones industrial average and Standard & Poor’s 500 index closed at record highs.
In reality, 90 percent of what happens in the market daily is just noise, Miller says. You’re generally better off ignoring the noise and looking at your investments at most once a month. “You want to be aware if the market does something crazy, but looking at your investments on a daily basis is counter-productive to the average investor,” he says.
Choose the right advisor.
Financial advisors can help alleviate the emotion and confusion associated with portfolio management, Brownstein says, but trying to find the right advisor can be a complex process in itself.
The trick is to ask the right questions up front, she says. For instance, according to Personal Capital’s 2017 Financial Trust Report, nearly half of Americans believe all financial advisors are legally required to act in their clients’ best interests when in fact only fiduciaries are. So the first question you should ask a potential advisor is if she is a fiduciary.
Other questions to ask include how the advisor will be compensated and the services she provides. “One of the most complicated aspects of investing can be trying to figure out what products you’re paying for and why,” Brownstein says. A good advisor will help clarify this.