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August 20, 2014


August 20, 2014 Perspective

August 20, 2014 by Lesjak Planning

In the two week period from July 23rd through August 7th, the Dow Industrials and S & P 500 declined about 4.5%. Headlines touted this as the beginning of the next major decline from the current record highs. Novice investors headed for the exits selling not only equities, but also high yield (Junk) bonds. It seemed as though the rout was on.

After just a few days, as the large scale selling slowed, big firms jumped in and bought the very stocks and bonds that the novices were selling just days before. Another case of the emotional investor getting duped? That remains to be seen.

No matter the outcome of this particular scenario what is important is how much the individual investor underperforms by making emotional decisions. A recent report we saw stated that over the past 20 years, the average investor underperformed every major category other than Asian or Japanese markets. The report suggests that investor’s timing of asset allocation decisions must have been particularly poor by buying assets that were overvalued and selling assets that were undervalued. The average investor even underperformed cash (3 month T-Bills)!

Many investors put too much importance on trying to “time” when to be either in or out of a specific investment or sector based on price movement. Most are better served with a strategy of buying quality investments that are diverse from one another as far as movement correlation, but yet compliment each other in a way that helps reduce overall volatility. While nothing is foolproof and there is a good possibility that values will decline at some point, a well constructed portfolio left alone has historically outperformed a timing traded portfolio. An additional benefit is there is much less anxiety.

It is too early to say how the current market environment will pan out. The analysts we confer with have the opinion that we are in a longer term secular bull market with years left to run.

Too often investors get lured away from their investment allocation with promises of higher returns and once in a lifetime opportunities.

Consistent returns with the addition of compounding interest wins out most of the time.

A recent quote supporting the slow and sure: “Three contestants in 1914 bet on the future value of money. Contestant A put one ounce of gold into a safety deposit box. Contestant B put $45cash into a safety deposit box. Contestant C put $45 into a savings instrument yielding 5%. In 2014, they compared notes: A’s gold is worth $1,300. B’s cash is worth $45. C’s balance is $6,609.”

Time and time again statistics show that following the herd in your investment approach usually leads to underperformance. You simply can’t take the same actions as everyone else and expect to outperform. Although the answer may not be obvious, it is imperative: you have to assemble a portfolio that is different than most other investors.

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Lesjak Planning

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