11 Truths That All Investors Must Accept

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published 12 April 2024

When working with inexperienced investors, I often find myself dispelling various investment myths and fallacies.

Frequently, these newbie investors have unrealistic expectations for their portfolio. Their warped view of the markets, and personal finances in general, often forms out of sound bites fed to them by friends, family members and the talking heads on TV or social media.

Below, I outline 11 investing truths that are worth reviewing at any stage but are particularly important for folks to fully understand as they start their investing journey. Sharing these truths may make me come off as a cynic, but as author George Bernard Shaw said, "The power of accurate observation is commonly called cynicism by those who have not got it."

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1. You won’t be able to consistently achieve investment returns in the mid-teens.

It seems like most of the investment strategies that are pitched to my firm target a return in the “mid-teens.” However, targeting a high rate of return and actually achieving it are two different things.

In the investing world, a double-digit return is high. It requires taking a high level of risk and is extremely unlikely to be achieved consistently. Any money manager who claims that they can deliver consistently outsized returns should be viewed skeptically.

2. You will likely not outperform the S&P 500 over the long-term.

The S&P 500 consists of the largest publicly traded companies in the United States. It is also one of the most widely cited benchmarks in the investing world. Unfortunately, it is very difficult to outpace this index over an extended period of time.

In fact, S&P Global publishes its S&P Indices Versus Active scorecards (known as SPIVA) twice a year comparing active funds’ performance relative to the S&P indexes over various periods. The scorecard highlighted that 92% of active large-cap fund managers underperformed the S&P 500 over the last 15 years.

While it is possible to outperform the S&P 500, it is not probable. Thankfully, outperforming this index is not necessary to be financially successful. Therefore, rather than worrying about an arbitrary benchmark, it’s far better to structure your portfolio based on your risk, time horizon and goals.

3. You won’t be successful day trading.

Day trading is gambling. No one possesses the prophetic abilities necessary to determine where the market will trade in the short term. Wall Street strategists, hedge fund managers, financial advisers and retail investors are all equally clueless.

Any strategy that depends on speculating on short-term market moves is a good way to lose money.

4. Your emotions are one of the biggest risks to your portfolio.

The latest geopolitical headwinds, inflation and a recession are all risks to one’s portfolio. However, the risk that trumps them all is your own behavior. Folks tend to make drastic decisions when they are feeling scared, greedy or impatient. These impulsive moves rarely, if ever, work out.

When it comes to emotions, the best approach is to keep them in check. This can be done by automating as much of your investment process as possible.

5. A high savings rate is more important than trying to achieve high returns.

Future returns are impossible to predict. Companies experience financial difficulty and go bankrupt. Money managers go in and out of favor, as do asset classes.

Investors can exert far more control over how they choose to allocate their cash flow. Deciding to maintain a high savings rate is one of the best tools investors have to secure their financial future. More savings means more funds for short-term expenses, more money invested for the future and more cash on hand in case of an unexpected expense.

6. Mixing politics and your portfolio is a recipe for disaster.

We are in a presidential election year, which means tensions are running high. Even the utterance of a particular nominee’s name is enough to enrage folks who are politically charged.

I’ve personally witnessed friends and acquaintances make rash decisions based on the outcome of presidential elections. Some have decided to move their entire portfolio into cash, and others took concentrated bets on specific areas of the market. I have a friend who liquidated his portfolio and moved overseas because he was not happy with the outcome of a particular election. This seemed like a strong reaction to election results.

Politics may be fun to chat about with friends or co-workers. However, it has no place in your portfolio. The markets don’t care who is in the Oval Office. Failure to embrace this reality will cost you a lot of money.

7. If you make money, you will need to pay taxes.

There are many legal ways to minimize one’s tax bill. This includes contributing to retirement accounts, using tax-efficient investments, using losses to offset gains and others. Despite many creative strategies to lower one’s tax bill, you will never be able to avoid them completely.

There is no way around the fact that if you make money, you will also need to pay Uncle Sam his share. Don’t lose sleep over this. It’s just the way every functioning democracy works.

8. Simplicity > complexity.

There is a tendency for investors to make their lives more complicated. This includes having funds scattered at various banks in search of the highest-yielding savings account and best investment strategies and using another firm for day trading. All these endeavors make one’s financial life unnecessarily complicated.

A better approach is to keep your investments streamlined. You can do this by keeping your money consolidated in only a few financial institutions, invested in plain vanilla investments and not chasing after the latest hot investment “opportunity.”

Keeping your finances simple will allow you to be organized and avoid major mistakes. As Leonardo da Vinci said, “Simplicity is the ultimate sophistication.”

9. Process > product.

It is highly unlikely that any single product will change the trajectory of your financial life. Discovering a home-run investment is a low-probability event, so searching for this needle in a haystack is a fool’s errand.

Instead, it’s far more productive to focus on your process for building wealth. This process includes spending less than you make, investing those savings in stocks and bonds and sticking with this strategy over the long-term. Adopting a disciplined process is far more likely to lead to riches than stumbling on the next Amazon or Nvidia.

10. Lifestyle decisions > investment returns.

Many of the best financial decisions are actually lifestyle decisions. Who you decide to marry, the career you choose and where you decide to live are all far more impactful to your nest egg than having outsized returns. A spendthrift spouse, dead-end job and living in a high-cost-of-living locale can all lead you to the poorhouse.

However, an employed spouse who is careful with money, a great job and residing in a low-cost-of-living part of the country can all lead to growing your wealth more effectively.

11. You will not get rich quickly.

We’ve all heard stories of some young kids who made a lot of money early in their careers. These stories are few and far between because they are not the norm. This is what makes them so memorable.

For most people, financial success takes decades of hard work, saving and investing. It’s a grind and not glamorous. Many of the wealthy people we read about or see on TV spent decades toiling at their craft before they achieved monetary success.

If you want to reach a high level of wealth, you will also need to put in the time and effort. The adage “life is a journey, not a destination” rings true when it comes to building your nest egg. Enjoy the journey and all the bumps along the way. For most people, the long path to riches helps build discipline and character and makes you appreciative of what you’ve accomplished.

It can take years for some people to appreciate these investing truths. It’s understandably natural to stay overly optimistic by believing things that are too good to be true. However, it’s important to be realistic. The quicker folks embrace these investing realities, the sooner they will be on the path to building wealth and achieving their financial objectives.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. ParkBridge Wealth Management is not affiliated with Kestra IS or Kestra AS. Investor Disclosures: www.kestrafinancial.com/disclosures.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Jonathan I. Shenkman, AIF®, is the President and Chief Investment Officer of ParkBridge Wealth Management and serves as a financial adviser and portfolio manager for his clients. In this role, he acts in a fiduciary capacity to help his clients achieve their financial goals.