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Past Tense Pitfalls

Aug 17, 2007
The warning label reads: Past performance is not an indication of future results. Your principal investment may loose value at any time. Yet, the need for growth encourages investors to look beyond the risks of any given investment due to our projected needs for retirement income, education funding, and other saving goals.

A familiar scenario may even transpire as we attempt to meet our goals and exceed the threat of inflation. An investor watches financial reports on television and reads several articles on the current market environment. Optimism overwhelms the common sense of the investor as he buys an investment with the little extra cash he has in his checking account. It increases almost immediately. To the investor, the economy looks good and so does his portfolio. Therefore, he decides additional capital should be placed with the advancing position and places more savings into it; this time at a higher cost. He ponders the idea of luck for a moment, but enjoys telling his friends of the success.

He now has a short term history of success and focuses solely upon his past results. The haunting words, past performance is not an indication of future results, come to mind infrequently. He is now investing in past tense and ignores risk of principal.

Good news continues to drive the price of his position higher and he may even take a third and larger position in it. Without warning, there is a sell off in the market place and the price of his position drops dramatically. He recalls the more profitable times and hopes for a rebound. The rebound never occurs and he now has an unrealized loss in his portfolio. Without an exit strategy, he holds onto the hope that the position will resume an upward trend. Before long, he refuses to open his statements and may even fabricate stories of great wealth before the crash to his friends.

His loss grows greater. Controlled by panic and the idea of never fulfilling his dreams and goals, he becomes impatient and sells it all. For a short while he is content, because the market continues to loose value and he feels he made the right decision. Later, he reads reports on the struggling economy. It is at that moment, he recalls the generalized statement: movements in security prices often precede changes in our economy.

Dwelling upon his failure, he fears taking any position in similar investments. Like others before him, he realizes investors will always need the market more than the market needs them. Several weeks pass and he catches a blurb on television. The investment he sold for a loss proved to have strong fundamentals and its price is poised to reach an all time high. If he decides to invest in it again, he would do so at higher price, thus subscribing to the whipsaw effect of the position. This is a dangerous proposition for his savings because he would be chasing trends. He would be investing in past tense.

Where did the investor go wrong and what can you do to prevent a similar experience with your savings?

Several aspects of the situation proved wrong. First, every investor must have a legitimate approach to saving. The game plan for one investor may be simple. For example, the stated investment policy may read concisely. Such as, an aggressive five-year savings plan for a fishing boat. Others may find a more detailed policy in order. The statement may be: a conservative ten-year plan to save for retirement while simultaneously drawing $1500 of monthly income for the private education of my three children. Vague investment goals such as to make money are best avoided.

Once the game plan has been formatted, your investment strategy should become clear and you will begin to realize right from wrong. You will better understand the investments that belong in your asset allocation and the ones that may contradict your goals.

Another mistake made by the investor centers around his information sources. The media, from television news programs to printed periodicals, provide a simple means to learn broad saving strategies and they may be educational on several levels. They may also entertain while reporting on important events. However, one should realize the news is viewed by millions. Thus, a single viewer is not receiving unique information and it may not be applicable for his/her given circumstances.

Ask yourself this question: Who cuts your meat?

Remember your childhood when one of your parents cut the meat on your dinner plate. Your mother or father provided reliable and safe assistance. They knew exactly what you needed. Now, as an adult, that same philosophy translates into other parts of your life. Your spouse knows the best gift for your birthday, your accountant knows the most appropriate deductions for your tax return, and your financial planner or advisor knows the goals of your portfolio. Speak with your financial professional about your situation. An understanding of your risk tolerances, goals, and time horizons will guide you toward the proper set up of your accounts. Additionally, planners and advisors review volumes of information. Ask for his/her favorite source of information for your particular circumstances. This will help eliminate the frothy excess of literature available on the internet and in the book stores.

Arguably, the most detrimental mistake of our hypothetical investor is when he dwells upon the what could have been. This mind-set is important to overcome and will inevitably lead toward regret and frustration. Measuring past performance, reviewing historical trends, and learning from adverse market conditions assist us in developing the most suitable approach to saving. However, when an investor constantly recounts past deficiencies as an indication of what will undeniably occur in the future, he/she will find a portfolio without direction. Remember, past performance is not an indication of future results, it is just a testimonial. In creating a greater net worth for you and your family, aligning positive perspectives with specific investment policy statements will help achieve your anticipated goals.
About the Author
Wardlaw assists financial planners/advisors, brokerage firms, periodicals, and other investment information syndicates create informative and entertaining articles. For comments and questions, please contact the author at http://www.tools2invest.com or tools2invest@yahoo.com.
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