Click on the audio below to listen to why you should toss your quarterly investment reports:
We’re nearing the mid year mark, and soon you’ll receive
your mid year investment reports. If you have a financial advisor he might send you his own quarterly report which likely includes some sort of outlook for the rest of 2014 and a review of the significant events of the first half of this year.
The reports may say something like this:
“The first half of 2014 saw a surge in US equity markets driven by increased risk appetite by investors as they shrugged off stagnant unemployment reports and the uncertainty about interest rates.”
“The bond market shrugged off the fear of rising interest rates.”
“Our outlook for the rest of 2014 remains cautiously optimistic. After last year we think equities are probably overvalued and remain bearish in the near term but cautiously optimistic in the intermediate term. Therefore we recommend a more defensive stance and recommend more exposure to large blue chip stocks with stable growth such as consumer staples and healthcare industries.”
While all of that sounds impressive, what exactly do you or advisor do with that information?
How about this: ignore alot of it because it might be a waste of your time.
First anytime you read a review of economic events in the past quarter, those events have already happened so it’s too late to adjust your portfolio to those events. Yes, unemployment may still be high. Yes, interest rates went down. Yes, manufacturing was flat. The problem is that none of this predicts what will happen next quarter. And even if it did, you and your financial advisor are not the only ones who know this information. None of this is a secret. Everyone else already knows. So prices have already adjusted for this information and by the time you know it, it’s too late to adjust your investment portfolio.
Second, you’ll read incredibly vague phrases like “cautiously optimistic.” What exactly does that mean? I have no idea, neither do you, and I can assure your advisor doesn’t either. But it creates the illusion of sophistication. Speaking of that, what does “near term” mean? Is it the next hour of trading, the next day, next week, next month? What about intermediate term? Investing is a LONG TERM process, so why all the talk about last quarter and the near term? But financial advisors purposefully use nebulous terms like this to make themselves look smarter than they really are. Think about it –if you don’t define exactly what these terms mean, then no matter what happens to the market or the economy, the advisor will tell you he’s right. If the market goes down, he’s right because he’s cautious. If the market goes up, he’s right because he’s optimistic.
Third, how can anyone or a group of people understand something as complex as the economy or the stock market and predict where they’re headed? The Fed can’t do it. Mutual fund managers can’t do it. How do you expect you or your financial advisor to do it?
Fourth, while last quarter’s performance was probably pretty good, there’s no predictive value for this quarter’s performance or even this year’s performance. What’s more important is figuring out your performance in relationship to meeting your future goals.
So when you receive your quarterly statements skip the economic outlook and summary. Instead focus on more meaningful things such as:
Do you have the portfolio that’s right for you?
Do you know how much and what types of risks you’re taking?
Is your portfolio tax efficient?
Do you know what losses to expect?
Bottom line: Toss your short term investment reports. They have no predictive value. Instead build and execute a well thought out investment plan.
Need help with that?