What to Consider When Investing?
Latrice Knighton is a member of the Sterling Law Offices partner team and an award-winning divorce attorney, life coach, and speaker. She helps clients resolve their problems by using legal techniques and smart tactics learned through decades of experience as well as helping clients by offering the best practical advice.
Investing can be both fun and exciting as there is a lot more to it than what appears to be on the surface. However, when starting out, it can be quite challenging as it's easy to get caught up among the complexities just like any new activity.
When first starting out it is important to have the proper assistance, just like with divorce, to help guide you through the unfamiliar terrain. There are many ways to start investing in your future and by having the proper support it will make the whole process easier.
Kevin Reardon, of Shakespeare Wealth, is a certified personal financial planner and is here to explain the fundamentals of a strong investment method and the benefits of investing in the long run rather than trying to make a quick buck.
The breakdown of “timing of the market” and it's flaws (0:50):
On August 13, 1973, if you were to listen to Business Week stating “The Death of Equities” then you would have missed a gain of 1337% gain over the next twenty years. It's important to be wary of listening to market forecasts because time in the market is more important than timing of the market.
Time in market vs timing of the market (1:33):
From 1994 – 2013, it is shown that the SMP500 (gauge of market performance) returned 9.2%. If you missed the top twenty days during that twenty year period, your returns would have dropped all the way down to 3%. If you were in the market the whole time there we be no need to worry about that drop in percent, however, when trying to time the market within those top twenty days there is a lot more risk involved because of human error.
Efficient Market Theory (2:08):
It is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.
Dollar Cost Averaging (3:33):
This concept is about buying throughout the course of a market cycle or as prices fluctuate up and down. When you have strong markets, that's where you have maximum financial risks, and conversely, when markets are falling that is the point for maximum financial opportunity. Investing can be like an emotional rollercoaster but if you remove the emotion, where you keep investing a fixed amount each month, you peak share price will be lower than your valley so it’s important to continue to invest throughout the various market cycles.
Knowing your time horizon (4:55):
This means that when lengthening holding periods of stock may reduce downside risk. If you’re investing in a one year period it’s very difficult to predict where the markets will go, but if your time horizon is ten or twenty years, your returns is much more easily predictable.
Stay Invested (5:54):
Although world crises may vary greatly, the market’s response to said crises is the same, eventually they work their way through all down markets and increase again.
Market Decline & Recovery Statistics (7:04)
Asset Allocation (8:00):
Equities have historically outperformed other asset classes, such as bonds and cash.
Equities are Good Bets (8:40)
Diversification Reduces Risk (9:48):
Asset class performance varies from year to year. It’s not good to invest in one particular thing because eventually in the business cycle it will be in the lower end of performance in future years. By having components of many different asset classes, even in bad years, the loss will not be as significant when comparing to investments in any one thing.
Benefits of Rebalancing (10:50):
Rebalancing is the concept of selling some of your winning securities each year and buying some of the securities that have lagged. In reality, when the markets are falling you are buying more equities and when equities are rising you’re selling them. When you rebalance annually, it can lower risk and enhance returns.
Asset Allocation (12:57):
You should be asking yourself: what percentage of your portfolio should you have in asset classes (stocks, bonds, real estate, etc)? This is because there is a correlation between stocks and bonds and knowing how to diversify them can increase your returns without drastically increasing your risk.
Proven Factors of Return (14:57):
- Equity Premium – stocks outperform bonds
- Size Premium – small caps outperform large caps
- Price Premium – value outperforms growth
Cap Weighted Index (17:56):
Market cap (or the size of the company) determines how much of the index you own. In cap weighted companies, you typically own more of the growth of the company. In order to avoid that, instead of determining the size of the weightings inside your funds by market caps, look at the price to sales, price to cash flow, price to book, price to dividends in order to determine what percentage each security gets within the fund.
Cap Weighted vs. Fundamental (19:01)
Video Recap (19:41)
References: Kevin Reardon, Shakespeare Wealth