The greatest challenge when it comes to investing is simply this—do nothing. It goes against everything we know. Yet it’s the best decision goal-based investors can make. Goal-based investments align your investment choices with your long-term goals for life, as opposed to trying to always maximize returns. The point of this approach is to focus on achieving your goals at a quicker pace because your risk tolerance isn’t dictating your investment strategy, your goals are. Recently we’ve seen the markets make huge strides, hitting all-time highs, and here I am telling you to do nothing. Here’s why.
If you’re a history buff, you may have heard of the Manhattan Project. If you’re not, you can read about it here. It was during the Manhattan Project that a group of high school girls were brought in to monitor dials on calutrons. The girls were given very specific instructions they were to adhere to. These young, uneducated high school girls who followed the rules and didn’t make their own adjustments received better results than those who had PhDs and were trained in that discipline. What they found is the more educated people are, the more likely they are to think they can outperform the rules.
The Buffett Challenge
Not any different than the world of investing and a real-world example of that is the challenge made between Warren Buffett and hedge fund manager Tom Seides. Hedge fund managers like Seides are considered some of the most elite money managers in the world. This is mainly because they have access to inside information. Buffett dared Seides to outperform his simple index fund investment. Each man invested $320,000 in their respective arena and after eight years, Buffett isn’t just winning, he’s trouncing the competition. In only two of the last seven years has the hedge funds outperformed the market indexes. In fact, they are significantly below the index. The point is just because someone is an expert in a field doesn’t mean they’re always going to return better results. (For related reading, see: Will Buffett Win the Bet? Hedge Funds Lag S&P for Eighth Year.)
Does this mean if you invest in a simple index fund you’ll see the same returns as Warren Buffett? Not even close. Warren Buffett has done something few have ever done in investing. That’s the same as thinking I can watch Michael Phelps swim, have the same coach as Phelps, eat the same food as him and achieve the exact same results. It’s just ludicrous. Yet in investing many young investors believe they can do it on their own. That’s where working with a certified financial planner (CFP) can help.
The Benefits of Working With a Financial Advisor
Vangard did a study that the average investor can potentially return about 3% more working with an investment advisor than they do on their own. So if you were to invest on your own you may get a decent return, but those who work with a true wealth planner may have the potential for more growth over time. This is because most good CFPs realize the best thing they can do for a client isn’t beating the markets; rather it’s controlling emotions and keeping them from making bad decisions. Our task is helping them stay focused on their long-term goals by not allowing them to play with fire—because inevitably they’ll get burned. We’re keeping them from being like the PhDs in the Manhattan Project and we don’t allow them to get caught up in trying to be Warren Buffett either. We like to keep it simple by encouraging them to stay the course and keep focused on long-term goals.
(For more from this author, see: The Roles Fear and Greed Play in Investing.)
Article originally featured on Financiallysimple.com. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Heritage Investor, 11470 Parkside Dr Suite 201, Knoxville, TN 37934, (865) 690-1155, (865) 690-1155, is an independent firm with securities offered through Summit Brokerage Services, Inc., Member FINRA, SIPC. Advisory services offered through Summit Financial Group, Inc., a Registered Investment Advisor.