Seeking financial success? Follow these 5 less-than-exciting rules of thumb

Jeff Bernier |
By Jeff Bernier

Back in college, I took an entomology class called ‘Bugs & Man’ with an older, “cool” professor named A.B Weatherby. During yet another dreary slide presentation, he woke the whole class up when he suddenly veered off into a story about how it’s “sometimes fun to chase butterflies.” Suddenly, up on the screen was an image of this 80-year-old man running through a meadow, armed with a net, chasing butterflies! If that wasn’t enough, the next slide was of the esteemed Professor Weatherby chasing butterflies shirtless, “because butterflies are naturally attracted to skin.” The next slide was (and I’m not making this up!) of my distinguished professor, half naked, tromping through the meadow with a female manikin, “because chasing butterflies is always more fun with a friend!” The final slide, and the punchline to his joke, was a picture of the good professor in deep embrace and kissing the manikin! “How did that get in there?” he exclaimed. Then, without further comment, he advanced to the next slide and returned to his typically dry presentation about bugs… but boy, did he have our attention!

I don’t remember much else from that class, but I did learn an important lesson about marketing—and how fantastical headlines and images can grab an audience’s attention even toward the dullest of topics.

I can’t help but think about Dr. Weatherby every time I see a new headline about the stock market. “Retire Rich!” “Sell Stocks Now!” “The Looming Recession!” Every one of these headlines is designed to do one thing: get eyeballs on the page to sell advertising. Why? Because writing about how to build a balanced, rules-based, long-term investment strategy is about as exciting to most investors as the pathophysiological phenotypes of a fruit fly (thanks Dr. Weatherby). And yet if I had the power to pick and choose what investors read—online or off—about how, when, and why to invest, here are a few things I’d tell them:

  1. Focusing on “selection and timing” to try to outperform the market
    is a loser’s game.

    Many people truly believe that owning an investment that beats some arbitrary benchmark will somehow endow them with a retirement income that they cannot outlive, an education for their children, or the means to leave meaningful legacies to people or causes they value most. In truth, however, “outperformance” is not a financial goal. In my decades as a financial advisor, it has been my experience that the more investors try to “beat the market,” the more likely it is that they end up underperforming the major indexes by an even wider margin. Rather than falling for the gimmicks, build a goal-focused and planning-driven portfolio that strives to capture what markets deliver using a low-cost, tax-efficient strategy.
  2. Most people fail to accomplish their financial goals not because of what their investments do,
    but because of what they do.

    Emotions are often the worst thing that can happen to a sound portfolio. I often say that our job as advisors is to spend many hours working with a client to create a smart, goals-based investment strategy—and the next 30 years keeping them from reacting to the markets and steering their strategies off course.
  3. Your investment strategy should be driven by your financial goals—
    not an unreliable forecast or the fad of the day.

    Your goal is to build and preserve assets over the long haul. Whether you choose to use those assets in retirement, to leave a legacy to your family, or to support a life rich in meaning and significance, your strategy should reflect your long-term time horizon and personal goals. Once you have a rules-based strategy in place, trust the efficiency of the markets and the reliability of market cycles. While the facts and circumstances around market movement may change over time, how the markets behave over time has remained consistent for years. That means that even if it feels different “this time,” it very likely isn’t.
  4. Multiple-asset-class diversification delivers better results over time
    than the best performing idea “du jour”.

    It may sound about as exciting as the subclasses of Orthoptera (that’s grasshoppers and crickets, if you missed class that day), but owning a mix of asset classes with positive expected returns that are non-correlated (meaning they don’t all move in the same direction at the same time) does an amazing job at creating real wealth and reducing volatility so you can stick with your strategy. Rebalancing that mix using a rules-based strategy that takes advantage of momentum (by not trading too much) and mean reversion (by selling more expensive asset classes and purchasing those with better value) helps keep your portfolio aligned with your goals by taking advantage of changes in the market—without the danger of reacting emotionally to market shifts.
  5. Time in the market—not timing the market—
    is what delivers long-term returns.

    Over the past year or so, the news has been full of headlines about the risk of a US equity market that is “too high.” That’s really only true if you plan to use your capital for a goal that is 5 years or fewer down the road. In this case, you would be wise to preserve those funds outside of the equities market. However, if your goal is to provide a rising income stream over a 30-year period (the average life expectancy for a newly retired married couple), then allocating a significant portion of your retirement capital to equities is wise, even at today’s values. Why? 60 years ago, the S&P 500 was at 44. Today, it’s sitting at around 2700. Despite the intervening ups and downs, time has shown that wealth accrues to the owners of the world’s great businesses over time. The challenge is having the courage to stay invested, and to learn to embrace uncertainty today for financial security tomorrow.

I just remembered one more thing Dr. Weatherby taught me that semester: Mayflies (which belong to the order Ephemeroptera, by the way) live only for one day. They are born, lay eggs, and die. Oddly, they serve no other purpose than to reproduce—for another bug for another day. Perhaps the best advice I can offer to investors is not to be a mayfly. Instead of investing for the day, invest for the long term. Build a goals-based strategy that uses the efficiency of the capital markets to your advantage, keep that strategy balanced and aligned with your goals over time, and stay invested. It may not be as exciting as chasing butterflies with a manikin, but it will almost certainly help you reach your financial goals over the long term. For an investor, that’s pretty exciting all by itself.

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