SCCU Financial Services CONNECTIONS articles
Does Your Investing Personality Affect Returns?
Do you consider yourself an experienced investor or are you just learning the ropes? Whether you feel you are an aggressive investor or a defensive investor, newbie or old-hand, there are several basic rules you need to know, understand and apply to your investment plan. These rules apply no matter what your investing personality is. It’s our job to help you plan, manage and grow your wealth and at the SCCU Investment Center (available through CFS*, our broker–dealer) we love what we do! This month there are two key investment rules we want you to consider:
Investors should invest with a goal of potentially maximizing total real return. This term represents the return on invested dollars after taxes and inflation. Real return should be the only reasonable objective for long-term investors and is what drives the most successful investors today. It is imperative that investors recognize the impact that taxes and inflation have on their portfolios.
It is critical that you help protect the purchasing power of your portfolio. One of the most dangerous strategies to employ is keeping all of your investments in fixed–income securities because the impact of inflation is real. For example, think about the price of a 4–door sedan, a prescription medication, a postage stamp, or a loaf of bread just 20 years ago. Each of these items is now significantly more expensive. These are all classic examples of inflation in action.
If inflation averages 4%, it will reduce the purchasing power of your $100,000 portfolio to $68,000 in only 10 years! Stated another way, to maintain the same purchasing power your portfolio must grow to $147,000 just to remain even over a single decade. While inflation consistently erodes purchasing power, taxes may take an even larger slice. We’ll discuss taxes in more detail in a later article.
The stock market is not a casino, but many people act as if it is. If you trade constantly and try to time the momentum of the market by selling short or trading extensively in futures or options, you will wind up like most gamblers and lose… eventually. There are two ways to lose when employing these undesirable techniques. First, you may guess incorrectly and be on the wrong side (buy/sell) of a transaction. Or you may see your profits consumed by trading costs. Either way, the gambler will likely under–perform the rational investor.
Gambling can be an emotional event; investing should always be rational. A rational investor tends to be better informed and make fewer changes to their portfolio than a gambler. As a result, the long-term investor is more relaxed, more patient and less emotional. There are additional benefits to being a rational investor–namely potentially smaller capital gains tax exposure and lower trading costs.
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broker/dealer and is not affiliated with LPL Financial.
- NOT NCUA INSURED
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- MAY LOSE VALUE
This site is designed for U.S. residents only. The services offered within this site are available exclusively though our U.S. Investment Representatives. LPL Financial U.S. Investment Representatives may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state.
