Change the Way You Think About Investing
A few weeks ago, The Johnston Group hosted an event at the Hewing Hotel in downtown Minneapolis titled, “Change the Way You Think About Investing.” It was a fantastic evening with more than 75 attendees gathering for food, drinks and discussion at a fabulous venue. We always enjoy socializing with clients and friends, but also wanted to use the event as an opportunity to provide investment education and offer our perspective on investing and how individuals should approach the topic.
To be sure, there are no shortage of opinions and options when it comes to investing money. Most of the financial services industry engages the public in a comprehensive sales and marketing campaign that makes things incredibly confusing for the individual investor. It also frames the topic of investing as some game or exciting form of entertainment pitting winners against losers. The industry wants to make investing seem like an extremely complicated endeavor that requires complex investing strategies, precise stock selection and brilliant market timing to be successful.
I’ve been in the investment management industry for more than four decades. The early part of my career was spent in the sales and marketing arm of the financial services industry. The focus there was and remains selling products and generating commissions. Clients’ best interests are often a secondary concern. I founded The Johnston Group in 1994 with the sole purpose of putting the client’s interests at the center of any planning or investment discussion, and I sought to put investing into the proper perspective for my clients and their families. Over the years, so many of the questions on the topic of investing revolve around the HOW to invest?
- How should I invest my money?
- What stocks should I pick?
- What is the market going to do?
- Is this product a good idea?
The problem with these questions is that they all ignore the much more important question, which is WHY are we investing? Without first understanding the ultimate purpose for investing – the WHY – it’s impossible to provide advice or guidance on HOW one should invest.
People invest for all different kinds of reasons – retirement, education, saving for a business, or a home, or to leave a legacy for their family. Depending on your life situation, time horizon and risk tolerance, the proper investing approach for each of these goals can vary. Therefore, before any tactical approach to investing can even be discussed, it’s important to step back and understand the overall purpose: WHY you are investing.
Now once that WHY is determined, the important next step of deciding HOW to invest can be addressed.
Before offering some of my thoughts on how individuals should approach investing their money, I want to review some of the different avenues that many people choose when pursuing an investment strategy:
- A lot of people try to predict the future. They select a few stocks they believe will do very well, or they try to time the market before a big rally or downturn.
- Others act on emotion or fear, making decisions based on their current mood around the market.
- People are often swayed by the media – “buy this stock”, “go to gold”, “big year for the technology sector”, “this market is about to crash.”
- Or they act on hunches and tips – “my co-worker told me about this idea”, “I heard my neighbor” say this.”
These are just some examples, but all illustrate a common fatal problem that many people have when investing their money: there is no consistent process or long-term plan. These are all short-term, speculative decisions. There is significant empirical evidence that investing strategies guided by these types of decisions or emotions hurt investors over the long-run.
Investors are much better off adopting a long-term strategy and executing this strategy consistently throughout their investing lives. At The Johnston Group, we approach investment management in the context of a much larger process that focuses on identifying our client’s goals and implementing a strategy to achieve them. Our process typically follows these steps:
- Define your goals, values and objectives using specific dollars and deadlines
- Identify and understand your personal balance sheet and cash flow statements
- Determine your potential range of savings rates
The portfolios we construct for our clients focus on three main principles: diversification, low-cost and tax efficiency. Also, rather than make our decisions on speculation or emotion, we practice an evidence-based approach to investing based on decades worth of data and academic research.
Despite the common perception, successful investing has more to do with committing to a long-term process and avoiding mistakes, more than picking a few brilliant stocks or timing the market consistently, which may work once or twice but cannot be a reliable or repeatable process. Decisions should be made in the context of a much larger plan, and investing should never be viewed as a game or form of entertainment.
To find out more about our investment approach or how we can help create your personal financial strategy, please reach out to any of our talented teammates or contact me directly at email@example.com