Using what is known about investing should lead to better investment results, writes Peter Watson.
Some of the keys to successful investing were discussed during a summertime interview on Bloomberg with David Booth, Co-founder, and Chairman of Dimensional Fund Advisors.
I will give the key comments of the interview and then provide information to support what was said.
One. The stock market is smarter than individual investors.
If investors were able to outsmart the stock market, they would have consistent superior investing results than the underlying market in which they invest. Decades of analyzing investment results plus academic research supports Booth’s comments.
Two. It is disappointing when investors sell during a temporary dip in stock market values.
Investing in stock is appropriate for a long-term investor and short-term reactions to market dips are often a costly mistake. There is a lot of human psychology that comes into effect and the one conclusion is the natural tendency of humans is not to be good patient investors.
Three. For those in the business of stock picking, they always think that the current situation favours stock pickers.
I find it interesting that this persists, even though virtually all of the evidence and what is known about investing concludes stock picking most often does not work.
Four. It is arrogant to think a stock picker can beat the market.
The logic here is the same as the point number three above.
Investors are encouraged to carefully consider their financial situation, investing goals and their timeframe.
When it comes time to develop your investment portfolio, use the information that is known about investing. That, in my opinion, will increase the chance of investment success.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com
