What I Know
Among today’s financial headlines is the prediction that stocks will rise today because traders are optimistic about the Freddie and Fannie takeovers. The articles I read commonly noted this optimism, but none of them explained to me why government intervention was cause for optimism.
Strangely enough, another headline noted that oil was trading lower today, even though dangerous Hurricane Ike was moving into the Gulf of Mexico and might threaten oil production in the Gulf. In contrast, about a week ago when Hurricane Gustav moved into the Gulf, oil traded higher. No explanation for the contrast from week to week was offered.
I Just Don’t Get It
The forces that move our equity and commodity markets might have explanations that are routed in science or math, and perhaps someone can explain those forces to me. But I doubt it. I have a degree from a good college and I graduated from a top law school. I have studied economics and history and higher math and just about every other discipline that you can name. How our markets work, however, don’t seem to be based on any of the sciences, at least from my perspective.
Rather, from what I have read, the markets move with the gut reactions of a few lead traders, reinforced by the imitative reactions of the rest of the trading herd. Maybe that is why every picture of the floor of the New York Stock Exchange looks to me like a picture of lemmings in suits playing follow the leader.
So I really should not base my financial decision making on what I read. I shouldn’t because I can’t. If the data is hollow, any conclusion I might make has to be questioned. I did not have to spend many decades reading the newspaper to figure this out. I knew it intuitively when I was a kid.
From the Mouths of Babes
When I was in first grade, my friends and I sat around a globe in our classroom looking at the continents. One of us — it might have been me or Marc or Brad or someone I do not even remember — commented that it looked like the continents would fit together like a puzzle. We all agreed and every year someone would bring that up again. It was not until 7th grade that a teacher ever explained the concept of continental drift to us, but that did not matter, because we already knew it.
Grasping the obvious was always a talent that kids seemed to have, but that adults seemed to have lost. The same held true with investing. My dad was always talking to his broker. Sometimes he would lament the direction of his stocks. Other times he would rejoice. When the market did well, so did he. When the market did poorly, he did poorly.
Seek Inspiration from Observable Market Forces
My dad’s problem was that he listened to his broker’s advice. His broker, I am convinced, listened to instruction that he received from his boss. The boss received instruction from higher up the food chain. At no point close to my dad was there any advisor who could explain to him why any recommendation or decision was being made.
By the time I was 15 years old, I was trying to convince my dad that he needed to base his decision making on the market forces that he, or we, could observe. As a high school freshman in the late 70’s, I noticed that the “popular” sneaker brands changed regularly and consistently as young people constantly strove to brand themselves. One day, I saw my class president wearing LA Gear branded sneakers. I had never heard of LA Gear so I checked the newspaper that afternoon and saw that it was trading at $7 per share. I told my dad to buy it. Within six months, most of the girls in my school were wearing LA Gear sneakers and the stock was trading at $53 per share.
I could understand the reasons that LA Gear would appreciate because I could see the increase in the number of people wearing the brand on their feet. The same held true for other brands. Blue jeans (Guess), retail stores (The Gap), clothing (iZod LaCoste). If I kept my eyes open, I could see market forces at play and I could understand them.
Invest in What You Understand
My dad gave me shares in Imperial Chemical when I graduated from college. I did not follow my own advice so I kept the shares. Eventually, they lost half their value. I still do not know why. When I received those shares I should have sold them and invested in something I could understand.
Instead, as an adult, I fell into the same pattern of investing that my father had followed. I listened to the advice of other people. It was only years later that I remembered by own advice and started to insist on having some kind of understanding of why I was making the investment decisions that I was making.
Know what you Understand
Think about your investments. Really think about them. Do you know what you own? Seriously. Do you know what you have in your portfolio? If we were to meet on the street and I were to ask you, could you tell me what you own? Could you tell me why you own it? Could you tell me about your asset allocation? Or how often you rebalance? Or could you only tell me the name of your financial advisor?
If you do not know what you own or understand why you own it, you are basically trusting your future to an advisor who may or may not be making good decisions. Keep in mind that to advise is not to take responsibility for your decisions. Responsibility is your job. If you do not understand your portfolio, you need to take the time to understand it. If you don’t, and you find yourself lamenting the loss of your nest egg some day, you can only blame yourself. Take charge of your financial responsibilities to yourself today, and you may find that you can avoid a lot of regrets later on.
What do you do to ensure that your nest egg is properly invested? What are your experiences with advisors? Are you happy with your portfolio or merely passively accepting less than you hope to receive? What has been your experience that has defined how you invest?
Image courtesy of dawnzy58