5 things to know you don't know about investing

istockphoto

(MoneyWatch) The ability to accept randomness in life is a challenge most people are unable to meet. Yet in the investment world, coming to terms with this fact of life is key. In that spirit, here are five things we must accept that we don't know to be a successful investor:

1. We don't know how the stock market will perform over the next year. For me, this is a particularly lonely realization, and one that I've wrestled with my own demons to overcome. As a certified pessimist, I always think markets are going to decline. I've learned not to follow my emotions, market gurus or the media.

2. We don't know what company currently on the horizon will be the next Apple or Lehman Brothers. Knowing the next hot stock, or even which stocks to avoid, could make any of us a fortune if such a thing were possible. I personally don't have access to a crystal ball and am not so naive as to think a really cool new product can tip me off. TIVO changed my life for the better -- I love it. Luckily, I didn't buy their stock.

3. We don't know where to invest. Is the technology sector going to outperform energy? Now that international stocks had a great summer, will overseas shares beat the U.S? Since small-cap and value shares have lagged over the past couple of years, will it finally outperform? I'm sure I don't know.

4. We don't know how bonds will perform next year. Many people tell me that since the Federal Reserve has promised to leave interest rates low though 2015, this proves there will be no bond bubble from rising rates. They apparently don't know the Fed only controls short-term rates. Like top economists, I've been wrong in my rate forecasts for decades. I just don't invest based on my forecasts.

5. We don't know more than other investors. Many people confuse knowledge with what it takes to beat the market. If I had a dime for everyone who told me they were investing in emerging markets because those countries were growing faster, I'd be obscenely rich. Those investors who told me this somehow believed it wasn't already priced into the market and that they were the only ones who realized this. They paid dearly.

Embrace the fact that knowing what you don't know gives you the edge in investing. Of course, it doesn't all come down to what we don't know. For instance, I know that I'm brilliant at predicting the past. I know the impact of expenses and emotions on investing. I know broad index funds are mathematically destined to beat active funds, especially those that have managers with long, successful track records, confusing skill with luck. I know watching the financial media on TV can be hazardous to your wealth.

I know investing is simple but not very easy.

  • Allan Roth On Twitter»

    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

Comments