Investing… A Game of Patience and Understanding

Investing… A Game of Patience and Understanding
19 Jan 2015

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When I first read this quote, I was put back with how simple it was. Yet, it was so very true. I have often said that investing by itself is not very difficult. It’s the “other stuff” that goes with it that complicates the issue. Like trying to invest long term in a very short term world. Also, expecting every investment in a portfolio, in the short term, to do well. Both of these observations are unrealistic and can cause you to repeat poor investment behaviors.

In 2008, when the S&P 500 suffered massive losses, almost every asset class went down. We learned very quickly the concept of correlation, or let me say lack of non-correlation. Dictionary.com defines non-correlation as “the degree to which two or more attributes (in this case, investments) show a tendency to vary together.” We want to be non-correlated in our investment portfolios.

A good example of what I am trying to say is let’s assume that you invest $100,000 in 10 $10,000 investments. At the end of the year (hypothetical case) you earn 8% on the whole portfolio. However, 2 of the 10 investments did poor. Since you were non-correlated (diversified) not all the accounts went down or moved in some direction. Actually, 80% of the portfolio did very well and 20% did not. Further, let’s assume your fair rate of return goal was 6%. Unfortunately, far too many people would spend all their focus on the 2 accounts that did poorly (in one year I might add) and lose sight of the bigger picture that you beat your goal of 6% per year by 33%! By definition, non-correlation means it’s OK to have investments move in different directions (some up, some down) in the short term.

Investors say they understand this, but the reality is we all want to hit the home run and have every investment do well all the time. This is again unrealistic and can create havoc for a long-term, well-diversified portfolio. So as another great philosopher once said, “Get out of the way of yourself…”

Good luck!

Jeffrey A. Johnston, ChFC
Investment Advisor Representative

 

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Premier Investments of Iowa, Inc. are not affiliated.

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Jeffrey Johnston

Jeffrey is originally from Solon, Iowa. He currently resides in Swisher, Iowa with his wife, Prudence, and his three children, Seth, Ian, and Roman. He graduated from the University of Northern Iowa in 1989, where he majored in Finance and Investments. He has 24 years of experience in the investment and estate planning business. He is currently the President of “Premier Investments of Iowa, Inc.” Jeffrey’s main focus is Estate and Investment Planning for Senior Citizens and Pre Retirees. Jeffrey became a Chartered Financial Consultant (ChFC) in 2001. He is the author of many articles on industry related topics and he is a frequent seminar presenter. He is a Board Member TRIAD Linn County Seniors Against Crime, and he is also a past Board Member of the Heritage Area Agency on Aging Task Force. He is a member of CEO Roundtable in Cedar Rapids, a Daybreak Rotary Member, and a member of the Cedar Rapids Estate Planning Council. In March of 2009, Jeffrey became the host of the Premier Investments of Iowa Financial Hour which airs every Tuesday Evening from 6PM -7PM, on WMT 600 AM Radio. In his free time he enjoys golf, fishing, scuba diving, traveling, and coaching son’s basketball teams.