Commentaries

The Envestnet Edge, May/June 2018

Five (Investing) Rules To Live By​

Download the full PDF

In today’s world of investing, it’s easy to be whipsawed by the words of wisdom espoused by various gurus. Noisy rhetoric is not always accurate—no one has a crystal ball, so prognosticators can’t know for sure what the markets are predicting. But heeding a simple set of guidelines may keep investors centered, help avoid unforced errors, and maintain a path to achieve their goals.

Every now and then, it’s a good idea for investors to step back and consider some basic principles to help guide their investing decisions. In that spirit, we’re offering a rare list of five things to keep in mind when considering what to do in the ever-churning world of markets and a new climate that offers daily dramas.

Rule #1:

Filter out the noise

We live in a word suffused with news, and most of it is negative. The 20th century newspaper cliché “if it doesn’t bleed, it doesn’t lead” is doubly true in an internet, cable-news, 24/7 culture. With so much cacophony, the loud and the alarmist are what penetrate the noise. So does the endless need to come up with neat stories that explain how markets are moving, even if those stories change daily. With very rare exceptions, the noise du jour will not lead to sound investing decisions, nor to a better understanding of what is going on in the world.

Rule #2:

Ask whether it’s true

Investors clicking on news sites or glancing at headlines find that the statements are often conclusive and unambiguous. “Markets sink on fear of trade war.” “Interest rates surge as consumer spending picks up.” “Get ready for inflation, says strategist.” It’s easy enough to take those pronouncements at face value, or to internalize those messages without really intending to. But given the culture of noise and the incentives to go to extremes, it’s more vital than ever not to assume anything is true without doing a bit more research. Especially in an era where there are real challenges of false news, assessing whether something is true can be the difference between acting on bad information and making measured decisions. 

Rule #3:

Respect emotions, but don’t act on them immediately

We often hear the admonition not to trade or make investing decisions based on emotions, whether they be fear or greed or any others. That might be true in a universe populated entirely by rational actors, but humans have emotions. Respecting that fact would seem a better course of action than rejecting it, and emotions tend to be valuable and vital. While fear per se is rarely a good foundation for making investing decisions, investing also shouldn’t be a constant source of fear, and if it is, it’s probably time to reconsider how one is invested. The choice isn’t between acting impulsively on emotions or ignoring them; rather, the better choice is to respect the emotional triggers, see what underlies them, and then assess what action to take. 

Rule #4:

No one knows the future

Talk about an obvious statement that somehow isn’t so obvious when we listen to market commentators, pundits, and even investment professionals. For too long, market mavens who exude certainty have been rewarded over those who admit that there’s much in the market that they don’t know, and that the future is and always will be terra incognita. When a respected investor says something such as, “Of course, interest rates are going higher,” or “Markets are by any measure overvalued and are due for a correction,” the next question should be, how do you know? Past patterns might suggest certain future likely outcomes, but frequently, patterns break down, or the unexpected and unprecedented happen. Listen to what everyone has to say, but if someone seems certain about future outcomes that are inherently uncertain, that should arouse some skepticism.

Rule #5:

Don’t worry too much about beating the market

In recent years, as the rise of personal benchmarking demonstrates, investors have come to question whether the “beat the market” mantra makes sense in many cases. The goal for the vast majority of people and institutions invested in markets is to achieve a set of goals, whether that means an endowment or pension plan meeting its obligations, an individual achieving retirement goals, or a family being able to afford a home. A laser focus on beating market returns could be at cross-purposes with reaching those goals, especially if doing so means taking on more risk or more volatility that could lead to higher returns over time, but also complicate when and how specific goals are met. There also is a tendency to judge success based on how well one performs relatively to a market index, when it is often the case that success means achieving specific goals.

It’s never been easy to distinguish the signal from the noise—to take a step back from the maelstrom of news and ask whether goals are being met regardless. It’s harder than ever today, with both the velocity of news and the speed of market moves accelerating. Tuning out is a mistake, but getting caught in the whirlwind is a risk. These five guidelines have been articulated by others, and they will be repeated in the future. They may not always lead to investors’ achieving the returns they want, but they almost certainly will not lead them astray. 

May/June Takeaway:​

In today’s investment world, news and market moves can keep investors off balance, rather than staying the course to accomplish their goals. Filtering the noise, distinguishing fact from fiction, respecting emotions and their underlying triggers, adopting a healthy dose of skepticism in the face of pronouncements from market mavens, and staying focused on achieving goals versus beating the market can be useful tools to guide their investment decisions. Although no guarantee for achieving goals, keeping these guidelines in mind may make for a smoother ride and help avoid costly mistakes.

FOR INVESTMENT PROFESSIONAL USE ONLY.

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results. Indices are unmanaged and their returns assume reinvestment of dividends and do not reflect any fees or expenses. It is not possible to invest directly in an index.

Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet | PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

Neither Envestnet, Envestnet | PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.

© 2018 Envestnet, Inc. All rights reserved.

Featuring

Articles By This Author

The Envestnet Edge, May/June 2018 Video: Five (Investing) Rules To Live By The Envestnet Edge, March/April 2018 Video: Buy The Dips Video: No Place Like Home? Market Bias Perceptions and Realities The Envestnet Edge, February 2018 The Envestnet Edge, January 2018 Video: Raging or Aging: How Much Longer Will the Bull Last? Webinar Replay: 2018 Market Outlook The Envestnet Edge, December 2017 Video: Bitcoin, Bubbles, and the Bigger Picture The Envestnet Edge, November 2017 Video: Taxes are certain, but don't obsess about tax reform The Envestnet Edge, October 2017 Video: Time to stock up on growth or value? The Envestnet Edge, September 2017 Video: Time To Take A (Measured) Risk? The Envestnet Edge, July/August 2017 Video: Bitcoin: Buy Or Buyer Beware? The Envestnet Edge, June 2017 Video: FANG, FAAMG: Too Big a Bite of the Market? The Envestnet Edge, May 2017 Video: Invest "As If" The Envestnet Edge, April 2017 Video: What To Do In Quiet Markets The Envestnet Edge, March 2017 Video: Bull Or Bear: Should Investors Still Care? PMC Weekly Review - March 10, 2017 The Envestnet Edge, February 2017 Video: Separating markets from politics, is it really a "Trump rally"? The Envestnet Edge, January 2017 Video: Investing in Trump’s Economy? Proceed With Caution The Envestnet Edge, December 2016 Video: Have We Only Just Begun? The Envestnet Edge, November 2016 Video: Rotations, Reversals, Rising Rates: A Time to Reposition Post-Election, Will Markets and Portfolios Emerge Winners or Losers? Webinar Replay: Post-Election Winners and Losers The Envestnet Edge, October 2016 Video: In a 2-2-2 world, look for modest economic growth and expansion PMC Weekly Review - September 16, 2016 The Envestnet Edge, September 2016 Video: Diversification is working in 2016 (so far) The Envestnet Edge, July/August 2016 Video: Valuations: it's all relative Brexit: Plunging into the Unknown? The Envestnet Edge, June 2016 Video: Equity valuations and bond yields: reach no further PMC Weekly Review - June 17, 2016 The Envestnet Edge, May 2016 Video: Hitting singles: a measured approach for this investing season The Envestnet Edge, April 2016 Video: Investing with impact: increasingly a matter-of-fact Video: In this election cycle, will investors be winners or losers? The Envestnet Edge, March 2016 PMC Weekly Review - March 11, 2016 Video: In a low-growth world, less could be more The Envestnet Edge, February 2016 The Envestnet Edge, January 2016 Video: Markets are a mess, but don't jump to conclusions yet A Most Challenging Year Video: Interest Rates and Energy: The Highs and Lows of Year-End The Envestnet Edge, December 2015 The Envestnet Edge, November 2015 Video: We'll always have Paris The Envestnet Edge, October 2015 Video: Politics and the markets: déjà vu all over again? Video: China, Commodities, and Crisis: What's Next for Emerging Markets? The Envestnet Edge, September 2015 PMC Weekly Review - September 11, 2015 Is This The Big One (Financially Speaking)? Probably Not. The Envestnet Edge, August 2015 Video: In a "meh" market, look again at U.S. stocks The Envestnet Edge, July 2015 Video: Is this the Big One? What to do in a financial crisis Don't Worry About China Don’t Believe the Hype About Greece The Greek Catastrophe Is Finally Here (Unless It Isn’t) The Envestnet Edge, May/June 2015 Video: When Following the Herd is Risky, Where is the Safety? The Envestnet Edge, April 2015 Video: The End of Short-Termism is Long Overdue PMC Weekly Review - April 24, 2015 The Envestnet Edge, March 2015 Video: Keep Your Friends Close and Your Robo-Advisor Closer The Envestnet Edge, February 2015 Video: The Return of the Comeback: Is 2015 the Year for International Stocks? PMC Weekly Review - February 13, 2015 Why the Jobs Report Means Diddly Don’t Turn America Into Europe PMC Weekly Review - January 23, 2015 Video: Active and Passive: The Yin and Yang of Investing The Envestnet Edge, January 2015 PMC Weekly Review - January 9, 2015 Will Politics in 2015 Catch Up with the Economy? Video: Our Perspective on 2015: Maintain Yours The Envestnet Edge, December 2014 PMC Market Commentary: December 12, 2014 No, This Is NOT the '90s Economy Again PMC Market Commentary: November 14, 2014 Video: 2014 U.S. Midterms: A Win for Stocks? The Envestnet Edge, November 2014 Whose Economy Will It Be in 2016? PMC Market Commentary: October 17, 2014 Video: Special Video Commentary: Market Volatility and Fundamentals The Envestnet Edge, October 2014 Video: You Know What’s Not Sustainable? Ignoring the Opportunity in Impact Investing Don’t Panic! PMC Market Commentary: October 10, 2014 Greenberg’s Folly Naomi Klein Is Wrong PMC Market Commentary: September 26, 2014 Subprime Loans Are Back! Video: When it Comes to Interest Rates, Who Says What Comes Down Must Go Up? The Envestnet Edge, September 2014 PMC Market Commentary: September 12, 2014 Why Indie Bookstores Are on the Rise Again The Fed Is Not As Powerful As We Think PMC Market Commentary: August 22, 2014 Americans' Sour Mood on the Economy Doesn't Square with the Fact The Envestnet Edge, August 2014 Video: The World is in Crisis... the Markets are not PMC Market Commentary: August 8, 2014 PMC Market Commentary: July 25, 2014 Punitive Damages Video: Market Valuations and The Theory of Relativity The Envestnet Edge, July 2014 Don’t Kill the Export-Import Bank. Clone It. How India’s Economic Rise Could Bolster America’s Economy Video: Separating Risk from Reality PMC Market Commentary: June 27, 2014 No Sex Please, We're French PMC Market Commentary: June 13, 2014 The Envestnet Edge, June 2014 PMC Weekly Market Review, May 23, 2014 The Envestnet Edge, May 2014 Don't Bet on Rising Wages PMC Market Commentary: May 9, 2014 The Sharing Economy: Why Are So Many So Afraid? PMC Market Commentary: April 25, 2014 The Obsession with CEO Pay Won't Help the Middle Class PMC Market Commentary: April 11, 2014 Time to Face Reality: Our Unemployment Problems Are Structural PMC Market Commentary: March 28, 2014 In Defense of Relentless Optimism The "Made in China" Fallacy Forget GDP - Use Big Data