No More Hope And Pray Investing

Without A Well Defined Investment Philosophy, Investors Are Just Grasping At Straws.

Investors want to feel safe and secure in their investment decisions. No one prefers the hope and pray approach. Yet, a real life story gives an example of what is happening to a family as a result of not taking the time to develop a deep rooted investment philosophy.

The kids are grown and raising their own children and mom and are supposed to be living out their days in peace at the Jersey Shore. The adult children from time to time check in on the parents to make sure they’re doing well. All should be well given the assets and income, Social Security, pensions, plus a nest egg somewhere in the neighborhood of $500,000. The retired mom started working with an advisor trying to make certain their money was wisely invested and going to last the rest of their lives. A few years into retirement, the $500,000 is about half of what it started out at, and mom, dad and the grown kids are more than a little concerned.

Mom can’t figure out how things have gone so badly, and the kids aren’t sure if mom and dad are going to come and live with them or if they’re going to have to relocate to South Jersey. No one but mom has ever met their current advisor, no one can say for sure how the money is invested, and mom is not eager for anyone to know how much of their nest egg is really left. Now mom is weighing the options of moving what’s left of her money to c.d.’s or maybe taking out a reverse mortgage. The problem is no one is at all certain if these moves are going to provide the solutions their looking for or make them worse. It’s a damned if you do, damned if you don’t dilemma.

So how does and investor find themselves in a predicament where they haven’t got a clue about what’s being done with their money and they’re completely in the dark about which is the right direction to go next? The answer is, not having a clear, well defined investment philosophy. The most uncomfortable place for an investor to be is to not be 100% clear about what they’re doing with their money and clearly understand why. You never know if tomorrow’s turn of events could mean you’re broke.

The question is how does an investor gain clarity? The simple answer is, develop your personal investment philosophy. This is a critical step for any investor if they’re going to have true peace of mind.

So what is a philosophy? It’s an internal belief system that anchors our decisions and behaviors. For example, Innocent until proven guilty guides our judicial system. People aren’t thrown in jail without a fair trial.

As for investing the fact that there are only two philosophies to choose from cuts down tremendously on information overload. They are, Free Markets Work and Free Markets Fail, and each comes with their own set of principles so you can see which aligns with your beliefs.

Free Markets Work beliefs are:

-Supply and demand is the best determinants of prices

-All knowable and predictable information is already factored into market prices

-Only unknowable and unpredictable information will move market prices

-The randomness of markets makes it impossible for any individual or entity to consistently predict in advance market movements and capture additional returns without adding additional costs and risk

Free Markets Fails beliefs are:

-Supply and demand is not the best determinant of market prices

-Some individuals can know in advance which markets or prices are inaccurate

-By identifying the markets or investments that are mispriced in advance investors can increase investment returns without adding additional risk.

One of these philosophies and their beliefs should align with your beliefs and that is your investment philosophy.

So how would this be of benefit to the family and the troubles they face? Having defined her philosophy, mom would have gained tremendous perspective as to whether or not the broker she was working with was right for her and her husband. Obviously, she would only want to be working with someone who shares her beliefs and would invest her money accordingly. Second, they’re would be no doubt about what should be done with the money next. Simply put, does the decision align with her beliefs or not. There wouldn’t be any more hope and pray decisions.

Lastly, mom could clearly articulate to her children what is being done with their money and know exactly why. When it’s being done the right way, you want to share your success with those you love and care about. The children would gain a peace of mind knowing that mom and dad are being taken care of.

So take the time to define your personal investment philosophy. Go back and read the principles behind each philosophy, and determine which philosophy is yours. The results should be you being a much stronger more focused investor.

Brendan Magee is the president and CEO of Inevitable Wealth Coaching. With questions or comments call 610-446-4322 or e-mail Brendan@coachgee.com