Investment fads are nothing new. When selecting strategies for their portfolios, investors are often tempted to seek out the latest and greatest investment opportunities.
Over the years, these approaches have sought to capitalize on developments such as the perceived relative strength of particular geographic regions, technological changes in the economy, or the popularity of different natural resources. But long-term investors should be aware that letting short-term trends influence their investment approach may be counterproductive. As Nobel laureate Eugene Fama said, “There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a marketing idea every week.”
It’s easy to see everything that is going wrong in the world. In fact, it would actually be challenging to read through a newspaper or turn on the news without being bombarded by all things terrible: political unrest, global warming, contaminated foods, disease outbreaks; the list goes on and on. On top of that, our brains tend to focus and remember the negative more than the positive. It’s called a “negativity bias”.[i] In this article, we will look at some reasons why this age of fast-paced globalization and unimaginable technology is pretty darn amazing.
Let There Be Light
It’s easy to take for granted the simple creature comforts when we have deadlines, kids, traffic, etc. But did you know that each day, nearly 300,000 people gain electricity for the first time? Another 305,000 get clean water. We are in a transitional state where huge populations are moving into the middle class, and with it comes advances in literacy, infrastructure, and amenities that improve quality of life, health, and infant mortality! For example, in 1960 19% of children died before the age of five and that number is now closer to 4%.[ii]
A quick online search for “Dow rallies 500 points” yields a cascade of news stories with similar titles, as does a similar search for “Dow drops 500 points.”
These types of headlines may make little sense to some investors, given that a “point” for the Dow and what it means to an individual’s portfolio may be unclear. The potential for misunderstanding also exists among even experienced market participants, given that index levels have risen over time and potential emotional anchors, such as a 500-point move, do not have the same impact on performance as they used to. With this in mind, we examine what a point move in the Dow means and the impact it may have on an investment portfolio.
impact of index construction
The Dow Jones Industrial Average was first calculated in 1896 and currently consists of 30 large cap US stocks. The Dow is a price-weighted index, which is different than more common market capitalization-weighted indices.
Many unsophisticated Investors buying complex financial products commonly misunderstand their suitability in an investment portfolio.
There is a misperception that investment products promising high returns and the maximum amount of safety do not come with risk. Lifestyle risk is the chance that some investments may not reflect our needs nor synchronize with our future lifestyle. The reason is the current assumptions for our investments are too vague since we cannot possibly foresee future events that may significantly affect our lives. We must prepare to live with uncertainty. Do not be simple in your financial decisions. Not all poems rhyme and not all stories have happy endings. These include the loss of a job or a loved one or both. Investments should be pliable to adjust to the needs at different stages of life as well as meet any unforeseen events that may unfold that affect our health, career or family. Therefore, investors need to be aware that one particular investment (putting all your eggs in one basket) may not be the solution that procures a safe secure financial future.
“I took a test in Existentialism. I left all the answers blank and got 100.”
Investment companies and advisors who work at these financial institutions have a responsibility to consider not only the suitability of each investor but to carefully consider the appropriate diversification of his other investments as well. Decisions an investor makes today can significantly affect his financial stability. If circumstances change, the original reasons why he purchased the product may also change. If you went to the doctor today the doctor might prescribe something for your current ailment. But the prescription will only address the needs you have now because neither you or doctor know what your needs will be twenty or thirty years from now.
Three Steps Toward Reshaping Your Financial Plan After a Divorce
“A story has no beginning or end: arbitrarily one chooses that moment of experience from which to look back or from which to look ahead.”
― Graham Greene, The End of the Affair
Life happens. Some of it we plan for, some of it we don’t. One transition that cannot be predicted is a divorce. Although it’s seldom in the plans, divorce ends half of marriages. For adults 50 and older the divorce rate has doubled since the 1990s. Many adults will have to divide up the saved assets that had been put aside to share in retirement. Even if both partners worked and saved well for their retirement, there is often a gap between partners when it comes to levels of earnings and wealth. This disparity can disproportionately affect women, as they may have taken time off for child-rearing or family needs. In this article, we will go over some factors to consider regarding divorce and your retirement.