Streetwise

Lauren Rudd

Sunday, August 26, 2012

Investing 101 for Adults

Many of you have asked for a repeat of some of the ideas that are often fodder for my students. A favorite of mine is how some investors collect endless quantities of data, analyze fundamental and/or technical statistics until they are dizzy, which are then followed up by reams of computer projections. Unfortunately, until the race is run you will not know for sure if your analysis and projections were accurate. Prior to that point, subjective human judgment must carry the day.

While computers can run complex algorithms and analyze reams of data with rapid speed, when compared to the human mind the most advanced computer is no more powerful than a dim flashlight. Although modern investment analysis would be severely set back if it were not for the ability of computers to carry out innumerable mathematical tasks on a repetitive basis, there is still no substitute for human judgment.

The downfall is that the human intellect is not immune to expectations and expectations are the "coin of the realm" on Wall Street. Expectations generally include a large dollop of hope, some dreaming and maybe a prayer or two. However, it is not until those expectations are bathed in the harsh light of reality do we see the true picture of where we are and how we got there.

Moreover, you often hear the comment that Wall Street is Las Vegas dressed in pin stripped suits. Needless to say, I adamantly disagree with that statement. While speculation could be viewed as sophisticated gambling, investing certainly is not.

Unfortunately, many of you have been tempted to fold your investment tent, a desire brought about in part by the Street’s seemingly unending lack of forthright behavior. Before doing so remember that the Street’s antics do not directly affect corporate performance.

Yet, too often the specter of the unknown can be a driving force that strips away logic, lowers expectations and create bargains for those astute enough to see through the emotional hysteria that so often envelops the Street.

So it is no real wonder that so many people are caught up in a variety of financial difficulties, whether it is falling victim to a Ponzi scheme, investing in techniques beyond their skill level, or simply following poor financial advice.

For example, according to one survey, a third of all adults have no non-retirement savings. Furthermore, a quarter of all adults have no savings for retirement. One in five people have said they can never afford to retire. Greeting jobs at Wal-Mart should not become a sought after form of employment. However, if you really want to put off retirement until you can “call in dead,” then forego an intelligent investment strategy.

One of the great retirement myths, assuming you can retire, is that upon retirement you no longer have to pay taxes. Sorry, but the Uncle’s tax collection department never sleeps, much less retires. Add in the Pollyanna expectation that just having a portfolio, even if it is unattended to, will save your bacon and there is trouble in the Land of Oz. 

Compounding is indeed a powerful force. However, failing to account for and accept market volatility has taught many would be investors a bitter lesson. Volatility is not a reason to abandon your portfolio. The key is to never disregard the precept of investment quality and the requirement for asset allocation.

Intelligent investing always does well against the never-retire symptoms, while greed will restrict even the best of intentions. Yet, some optimists continue to assume that one day their below average income will exceed their above average spending. Great, we call that the ostrich approach. That lack of foresight also lends itself well to the work-until-you-die lifestyle. Do you want Wal-Mart’s apply-by-phone number?