My kids are notorious for saying, “I don’t like it,” before sampling even one bite of a new food. Some adults I meet can have a similar attitude when it comes to trying new investment strategies.
Fear can be a prevalent emotion among investors. Some are so afraid of losing their hard-earned money that they seek out the most common delivery mechanism without considering other options. Risk aversion may lead others to haphazardly do whatever they see their friends and neighbours are doing.
Why do risk-averse investors most commonly wind up with mutual funds? You put up 100 percent of the capital and take on 100 percent of the risk. There’s a mere 4 percent chance that your managed mutual funds will match the market. Plus, over a 30-year period, you will pay more than 60 percent in fees to administrators who make money whether you do or not.
Yet, time and time again mutual funds end up within the average Canadian’s comfort zone. There is an illusion of control through which we feel we should be able to pick the right stocks or that some financial professional should have the ability to time the market to consistently achieve great results.
While it may be easy to justify those ideas, that thought process can be financially damaging. People who operate underneath this belief have trouble coming to terms with the irrationality and variability of markets and the impossibility of their expectations.
If you focus only on historical facts, in the absence of emotion, you come to recognize most variables in investing are outside the realm of control. The few things that are controllable--asset allocation, tax planning and consistent savings--are far more reliable than attempting to pick the perfect stock or to time the market.
Just as I try to convince my children to try new, healthy foods, “Don’t knock it until you try it.” The unknown might be more wonderful than you can imagine. Do your future self a favour and venture outside your comfort zone to investigate your investing options.
* Source: S&P500 Dow Jones Indicies LLC, IFIC.ca
Any views or opinions expressed on this website are solely those of the representative, and do not necessarily represent those of Harbourfront Wealth Management Inc. The information contained herein was obtained from sources believed to be reliable, however, the accuracy is not guaranteed.
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