A Formula for Investing Success

You want to have a successful investment experience. Otherwise you would not be reading this.

One of the key components of being successful at anything is to focus on your reaction to an event, not on the event itself.

I am no scientist and don’t like formulas, but this one will make sense to you.

One way to look at this is: e + r = o (Event + Response = Outcome)

The formula means the Outcome, either positive or negative, is the result of how you respond to an event, not just the result of the event itself.

In terms of investing and your financial future, a critical factor in how we respond to events and the world is to have a consistent philosophy. As David Booth, Founder and Executive Chairman of Dimensional Fund Advisors says, it is important to have an investment philosophy you can stick with, one that can help you stay the course.

As investing is a very long term endeavor, lasting for decades and fraught with down markets, up markets, constant analysis with varying opinions and predictions, political changes and unexpected crises….this simple but important belief in having a consistent investment philosophy can provide you with greater sense of confidence and financial security, as well as increase your odds of having a positive financial experience.

What does this mean in the real world?

When President Obama was first elected, many thought interest rates and inflation would increase significantly due to high deficit spending. If you believed this, your non-stock investments would have been in very short term bonds or other investments geared to your expectations of higher future inflation.

If you had viewed Obama’s decisions and policies, the (e) Event, and made predictions and investment decisions as described above, your (r) Response, then your (o) Outcome would have not been good, as interest rates and inflation remained far lower and longer than anyone predicted at the time.

Our Response (investment recommendations) and the Outcome for our clients was quite different. We did not purchase only very short term bonds and did not recommend inflation hedges. This was the right strategy, but not because we made the correct prediction. We followed our investment principles that we cannot accurately and consistently predict the future of interest rates and inflation. This led us to focus on what we can control, which was to invest in safe bonds of varying maturities that would return their principal and not bet on the direction of inflation and interest rates.

When the stock markets dropped drastically in 2008-2009 (the Event), we worked with our clients to remain disciplined and adhere to their defined investment plan, the Response. For some, they rebalanced and purchased more stocks at bargain prices. With discipline, our experience and counsel, our clients benefited from the subsequent significant market recovery, a much better Outcome.

If you respond to events like this with panic or allow your response to be controlled by emotion, you may sell or get out of the markets. Along with potentially missing the recovery, you may suffer from anxiety about when, or if, to get back in, leading to suboptimal returns (a bad Outcome).

This is why it is so critical to have an investment philosophy that is backed by decades of academic evidence and real life experience.
* We recognize the difference between investing and speculation
* We rely on the power of diversification to manage risk and increase the reliability of outcomes
* We monitor your progress against your long term investment goals.

This is another way we can be valuable to you and your family. We can simplify the complex financial world for you. We separate the emotion from investment decisions. We are objective and rational.  We provide financial, tax and estate planning expertise. We know that investing can be scary and at other times rewarding. We can help you stay the course through challenging times and develop a plan for your financial goals.

We strive to educate, communicate clearly (this weekly blog is one form of that), and plan with you. We will help you deal with and to Respond to even the most extreme market conditions. Our many years of investment experience, combined with the foundation of a consistent and proven investment philosophy, can be invaluable to you in responding to Events.

In the spirit of the e + r = o formula, good advice, driven by a sound philosophy, can help increase your probability of having a successful financial outcome.

Let’s talk.

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