Making financial choices is a daunting task as the result yields an objective number on your selection. Nobody likes to see that they exited a stock just before it took off or entered a new investment into a fresh drawdown. Sadly, this human characteristic often pushes us to ask the wrong questions.

The Power of Asking the Right Questions

Instead of asking where to get the highest return, we should ask how to position the portfolio for the best long-term growth. The latter thought process may lead to choices that move independently of each other. We discussed the power of negative correlation back in February. I thought it would be fun to share some of the reasons we normally hear for not investing. Many of these can be valid explanations but often share a core theme. Taking a leap, even one based on math and logic, is difficult. Investors faced with making what they believe is the best choice still maintain poor portfolios because the status quo is easier than adjusting to the unknown.

Reasons for Not Investing
  • Program not beating the market
  • Waiting for a good month
  • Waiting for a bad month
  • Waiting to make sure nothing is wrong with the program after a bad month (that the customer was waiting for)
  • Returns too low
  • Risk too high
  • The track record is too short
  • Need to see it trade through multiple business cycles
  • CTA does not have enough experience
  • The minimum is too high (after the trader gets experience)
  • Returns are too low, and I don’t want to use leverage
  • Trader’s positions are too big, and I can’t de-leverage
  • Waiting for a market correction
  • The market just dropped, and I am waiting for it to come back before I use that money for a new investment
  • Fees are too high
  • Trader doesn’t trade like I do
  • Paperwork is too hard
  • Waiting for a large cash payout I have coming.
The Fallacy of Predicting Market Events

20+ years of watching markets tell me that something unexpected is coming. When it does, we will all feel silly for missing it. This occurred when the bubble burst, the housing market collapsed, and each time, we experienced a “flash crash” that resulted in a fix to prevent it from happening again.

Financial advisors do not have a crystal ball, and CNBC pundits get paid to espouse opinions. Logic does not drive ratings, so the accuracy is irrelevant. Many of the people they interview also run commercials on their station. This is not a coincidence. Very few (if any) can outsmart the market. If they could, they would not air their best strategies for all to see.

The Role of Diversification

For investors, diversification is the best tool for long-term growth. This means across asset classes, trading styles, and direction. Most of us know this but struggle to execute this in our portfolios.

Please reach out if you would like to add more options to your portfolio. If not, feel free to use the handy list above. If there is a correction (particularly a large one), you might wish you had them already.

Photo by Fineas Anton on Unsplash