A recent post on Geek Tyrant reveals a 1977 film review of a newly released movie called “Star Wars.” Ever heard of it? This reviewer thinks you shouldn’t have.
According to the reviewer, “Star Wars will do very nicely for those lucky enough to be children or unlucky enough never to have grown up.” Needless to say, this reviewer didn’t think much of the movie or the world that George Lucas created; he even implied that Ben Kenobi’s (aka Obi Wan) name represented a veiled allusion to cannabis or hashish. Dude. The force is totally with you, man….
It’s a good thing that George Lucas and 20th Century Fox didn’t listen. The Star Wars universe has since gone on to amass over $4 billion dollars in worldwide ticket sales.
What does this have to do with your money? Plenty.
Naysayers exist all over the place, especially when it comes to investing your money, and they make compelling arguments for why you shouldn’t invest in Apple or Facebook or some other company, and they may be right. However, like this reviewer, they could also be completely off base.
As a financial advisor, I never wanted to trade on the crystal ball theory of trying to predict the future of a company, industry or geography. I know that research analysts will invest a great deal of time and energy into proving their crystal ball outlook; however, no matter how much time you invest, no one knows what will happen to an investment.
How do you avoid the crystal ball?
Step One – Asset Allocation
If your portfolio consists of more than one or two assets (i.e. stocks, bonds, real estate, etc.), then you spread your risk over more assets and reduce the stress of trying to determine which one will perform best over time. Looking back over 20 years, no single asset always performed well year in and year out. Even though, there are some indicators as to which asset may perform well in 2015, rather than place all your eggs in one basket, place them in a few.
Step Two – Diversification
Each asset class has various subclasses and if you want to further reduce your risk of exposure to one area, then you should diversify within your assets. For example, if you own stocks, you should own stocks of various sizes (i.e. large cap, small cap, mid cap) as well as stocks from different industries such as health care, banking, etc. and stocks from different geographical areas like Europe and Asia. When you diversify your assets across different categories you not only manage your risk but you also expose yourself to potential winners as well.
Step Three – Rebalancing
Finally, rather than worry about crystal balls, review your investment portfolio quarterly, semi-annually or annually and determine what areas performed well over the period and which didn’t and distribute your wins over your losses to rebalance your portfolio. When you rebalance you perform the very core of investing philosophy and that is buying low and selling high.
I’m sure for some people it’s fun to try to predict the future of an investment and trade on that prediction; however, I liken this philosophy to going to Vegas and putting all of your hard-earned money on red. It may work for some investors, but I don’t want to see my clients make choices like this with their future. I would much rather them take the boring approach of allocating, diversifying and rebalancing responsibly. If they have fun Vegas money leftover, then by all means, they are welcome to play investment roulette.
Have you ever made a stock prediction that did or didn’t come through?