Random Walk to Investing
When Baton Rouge Business Report asked us to send in a mini book review for their “Recommended Reads” section, we found it challenging to describe A Random Walk Down Wall Street in just 50 words. A classic on investing by Burton G. Malkiel, Random Walk was originally published in 1973 and has undergone many revisions and new editions since then. Today, the book remains a gimmick-free guide to navigating the turbulence of the market and managing investments with confidence.
In our review, we focused on Malkiel's continued support of passive, low-cost, diversified funds as an important part of any investment strategy — and the necessity of a good client/advisor relationship. Too many investors (and advisors) think that an advisor's sole task is to pick investments. It's not. An advisor who only picks investments and nothing else is simply a bad one. People don't always want to accept that they need help making decisions, and marketing geared toward making individuals believe they can outperform and trade their way to success on their own doesn't help matters. Plus, it's been proven that professional investment advisors add significant value to clients, albeit sometimes intangible.
Malkiel preaches that no one can accurately predict the ups and downs of the market. There have been studies that show a "blindfolded monkey" would have as much luck selecting a portfolio as a professional manager since stock prices cannot be predicted in the short-term. Poor planning, or a lack of planning altogether, is usually the predominate reason an investor fails to reach their goals. Improper asset allocation and performance chasing are just two more that we see often. In keeping with this theme, we wanted to share what suitable advisors are and what they are not. Too many investors search for an advisor using the wrong criteria and, consequently, based on this fallacy, many advisors market an approach that is certainly not achievable.
What We Are Not
Trying to find the next big stock or relative investment is unfortunately the method practiced by many investors. I believe that an advisor whose only objective is picking the best stocks, sticking funds needlessly in an insurance product or chasing performance does not have their clients' best interest in mind. Furthermore, attempting to outperform the markets and trade a portfolio are not foundations of a sound financial plan but rather a poor attempt at finding a shortcut.
Studies have shown that the more portfolios are traded, the worse they perform. In contrast, passive, diverse portfolios held for the long-term continually outperform. Furthermore, average historical market returns have always been plenty good enough for most investors to achieve their goals. It should be easily deduced that any attempt to outperform and trade only puts the odds of success against the investor. It is only when an investor finally accepts that the selection and timing approach is nothing more than a fool’s game — or a random walk — that the future suddenly begins to look brighter.
What We Are
Investing requires a long-term time horizon, an understanding of the risks involved, a resistance to rushing into the latest hot trend and a thoughtful investment strategy. Good advisors are not trying to time the market and select individual investments to outperform it. Part of our role is to build a proper portfolio allocation for a client and invest those funds. We're not looking for the next hot stock; we're looking for what's going to be best for you in 10, 20 or 30 years. We are building a good strategy that you will stick with and helping you make good decisions along the way.
There are no shortcuts to wealth. Investing becomes a whole lot easier and a lot less stressful when you stop focusing on today and start looking at the future. An advisor who delivers what clients desperately need — goal-focused planning, long-term historical perspective and behavioral modification — helps minimize mistakes.
The real role of an advisor is to guide clients through the good and bad times of the market, help them stay on track and plan for the future. If you find a good advisor, trust them and stick with them. You'll find yourself traveling down a road to success rather than taking a random walk when it comes to your financial future.
Building Trust
Our goal with this piece and any other information we share is to help you take a step back and realize that investing doesn’t have to be as hard as one might think. Unfortunately, a great deal of the financial investment industry is built on fictitious views and things that simply aren’t true. It might sound like I am devaluing my job, but I am not. It would be much easier to advertise the next big thing,but my long-term client relationships are built on trust. The major financial decisions, the ones that really matter, still need the supporting role of a proper advisor. Honestly, we are all guilty of being irrational from time to time. Having a qualified and experienced partner to steer us in the right direction is crucial to avoiding devastating mistakes.
Recommended Reads
I am thankful that Baton Rouge Business Report reached out to us regarding their “Recommended Reads” and am glad to share the information in this book with you. Over the course of my career, I’ve read hundreds of investing and financially related books, and there are a small few that stand out as truly beneficial reads. The trendy ones generally help us the least and take us further from our intended goal, while the ones that are rich in historical depth and rational perspective are true gems. From time to time, I intend to highlight some of these books for you. If you’d like to learn more, please reach out. I’d love to discuss them further with you.
Helping you become a better investor,
Mark Simmons
President
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