Do you know where value stocks are headed in the short term? How about interest rates? Do you think international investments will outperform the US stock market?
If you don't know the answers to these questions, don't worry—neither does anyone else. Oh, certainly there are lots of opinions out there about these topics and more, and you can read them in the headlines of the financial media every day. But the fact is, no one has ever demonstrated the consistent ability to predict the movements of the financial markets with any degree of accuracy greater than randomness. No matter what various gurus and pundits may tell you, nobody can tell you what prices will be a year or even a month from now.
The good news is that you don't need to be able to accurately predict the future to make effective use of the financial markets to meet your long-term goals. You just need to understand three things:
- The nature of risk in investing.
- A little bit about how markets work.
- The importance of diversification
Risk and expectations
Risk is a part of life and investing. If you think any investment out there contains a zero percent element of risk, then you don't understand the investment. Sure, you can park your money in a federally insured certificate of deposit earning a stated interest rate, and your risk of not getting your money back at maturity, plus the stated interest rate, is very low. But do you know how inflation risk affects your funds' value while sitting in that CD? Do you know how the global economy is affecting the relative purchasing power of your dollars, even as they're earning interest? Every investment has risk. The key is matching those risks with your expectations for the return you need from your investments.
Markets are a reliable pricing mechanism
Each of the millions of trades made daily in the financial markets represents a buyer and a seller agreeing on the value of whatever asset is being traded. That value is based on all the information concerning the asset the buyer and the seller have. So, when someone says, "I think the price of Stock X is about to go down," they're actually saying, "I think I know more about the value of Stock X than the thousands of people buying and selling that stock now. I think I know something that they don't know." They could be right about that, but more often, they're not. In fact, this goes back to where we started: no one has ever demonstrated that they can consistently, year in and year out, accurately predict the price movement of any stock or even any group of stocks. When you try to do that, you're working against how the markets are designed. But when you trust market pricing to play out over the long haul, you're letting the markets work for you.
Diversification is your friend
So, if you can't predict which stocks will perform best in a particular period, how do you know which ones to buy? You don't. Fortunately, there's a way to invest in a well-diversified basket of stocks, both from the US and worldwide. Mutual funds permit you to achieve broad diversification across various dimensions of the financial markets—both equities (stocks) and fixed income—so that you are in a position to capture the overall range of returns available at a given time. And the other encouraging thing about this "dimensional" approach is that it's based on decades of financial research by Nobel-winning economists and analysts.
As a fiduciary financial advising firm, Triada Advisors has years of experience in helping investors harness the power of the markets to help them pursue their long-term financial goals. By designing a strategy based on your individual risk expectations and building broadly diversified portfolios positioned across the various dimensions of expected returns, we provide fiduciary guidance and recommendations that are always in the best interest of our clients as we work with them toward their most cherished priorities. To learn more about how we help our clients position their investments to work with, not against, the markets, reach out to us today.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.