Who wants to make an easy $72 million?
Here are some lessons learned from chasing rainbows
You might have heard about the high school student who supposedly made $72 million investing in stocks. Turns out he was lying. I feel bad for the young man. But what happens to the people who started following his example, thinking they’re going to be making millions or thinking their investment managers are under-performing?
Answer: They’ll probably take unneeded risk, lose money and lose opportunity.
That’s a prime example of following advice given by the media. It’s understandable. I’ve learned a lot from newspapers, magazines and the internet. Those sources might help you out, as well, in forming opinions and learning about new investments and opportunities.
Thankfully, the $72-million-kid didn’t start managing anybody’s money. But others with bad ethics have. We all know of Madoff and his crooked exploits. Then the recession shook out a new Ponzi scheme weekly, if not daily, at times.
Most self-made millionaires buy and hold their investments. They don’t look for quick returns. This approach constantly gets criticized. It’s boring but it usually works really well. You do need to adjust your investment positions, sell gains and reinvest earnings but you can over-manage your investments. Most investors are best served with a core portfolio of multiple asset types. “A little bit of this, a little bit of that.” A smart allocation can produce high income, lower risk and go up in value throughout time.
The S&P 500 is now up for seven years in a row. That’s a lot of years. What I see and hear are investors ready to jump on that bandwagon, chasing another rainbow.
Is that the right investment move? What will be a top performer in the next five years? Is the U.S. cycle played out for now?
Everyone should have some U.S. stock exposure. I would never bet against the U.S. markets for long. Yet, if we’re looking at performance, the S&P 500 has actually underperformed other asset classes in all six of those years. It’s been outdone by emerging markets, the EAFE index, commodities, the Russell 2000 and even bonds!
That’s what I mean by losing opportunity. If we’re focused on only one asset category, we’ll experience extremes in volatility and miss out on other great categories that can grow better than our markets.