THE STRAIGHT S K I N N Y
How Much Does Luck Play Into the Economy? THE LUCK OF THE DRAW
Financial experts and the media try to inundate us with “sound” advice and predictions for the future of the market and our economy. The problem with following that advice is that no one actually knows what’s going to happen to the economy. Unfortunately, even seasoned experts cannot tell you what will happen a month from now. Various studies corroborate just how random the market can be. A researcher from the University of Chicago — who was also the first to utilize computers to track market fluctuation — found that there is no logical pattern when it comes to stock prices. Everything is random, and the only way to predict a change in the price is to have insider knowledge of what is happening. Here’s a great example of this phenomenon. In the early 1990s, some people invested early in AOL, and by 1999, those who cashed out won big. However, those who waited around until March through July of 2000 missed out on the riches and lost 50 percent in the dot-com bubble burst. So, the question is this: Was luck involved? The answer is yes and no. For those working with or in AOL, cashing out in 1999 was a smart choice. They saw the burst coming, and they were fortunate enough to be in a situation where they could make an informed move. But for your average Joe, or even the average advisor in Maryland, it might not have been quite as obvious. I often work with clients who mention they would like to invest in or purchase stock with a company because they like it. Apple is a common name I hear, and Maryland-based Under Armour is also a popular choice. While these are viable options, I often remind clients that they are not sitting in the boardrooms making decisions. You may like how a company is being run, and you may want to support it, but that does not mean it’s a wise choice to funnel your money into it. It’s easy to be panicked by the financial media with their many doom and gloom proclamations. The real answer to smart investing? Own all the markets and tilt toward those factors that influence returns. We now have
50-plus years of research that demonstrate what those
factors are, and algorithm technologies are always looking for more. Using the research, our mission is to capture the returns of the market, not chase them.
With a properly allocated portfolio, you are able to ride the roller coaster of market swings with more reasonable expectations. You can then “invest and worry less.” Understanding what is normal for your portfolio is crucial to being disciplined, patient, and focused on the long view. Knee-jerk reactions are always harmful. “Luck favors the prepared,” Edna Mode says in “The Incredibles.” It’s good advice for many areas of life, including your investment strategies. We work to keep clients prepared, so they can enjoy the things that really matter to them.
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