Be a Better Investor: Ignore the Big Picture

As Bernd wrote about today, DR Editor Greg Canavan was spot on about the direction gold would take.

Recent conflict in Iraq and concerns over Europe’s banking systems have seen investors seek a safe haven in gold. If you own gold, you should be celebrating today.

But for every expert who told you the gold price would rise, there was another arguing the price would fall.

In fact, here are a handful of headlines from the past month:

  • Gold’s Rally Won’t Last
  • Prices Could Hit $1,450 this Year
  • Gold Stock Rally ‘Forecasts a Trend’ for the Metal
  • Top Two Gold Forecasters Remain Bearish
  • Gold to fall to $1100 then Skyrocket
  • Prices to Drop as Traders Expected to Eye Dollar and Global Equities
  • Expect Gold, Silver Prices to Trade Sideways

That’s a lot of different opinions. And while Greg is more qualified to predict where gold prices are headed than the average forecaster, the fact is no one knows for sure what the future holds.

This creates a lot of confusion for investors. The conflicting opinions and advice make it hard to know what to believe.

Do you have the time or the expertise to sort through these ideas and form your own conclusion? Are you willing to bet your finances on it? Are you willing to risk your retirement?

Here’s my prediction: I don’t know where the gold price is headed! And neither do you.

But the finance industry will argue that you need to know what lies ahead before making any investment moves. They’ll tell you they have all the answers…for a ‘small’ fee. And if you pay them, they can tell you whether home values will go up or down. If interest rates will rise or fall. And how about the Australian dollar? You’ll need to know whether that’s over- or undervalued before you even think about investing.

So who do you believe? Which analyst is consistently able to predict the future?

None of them.

Even within our office here in Albert Park, there are vastly different takes on where markets are headed. Take the editors of the Markets and Money and Money Morning for example. They all have a different view on the economy, financial markets and how to best grow your wealth.

One of our gurus says we’re in a secular bear market and stocks are due for a huge correction. Another says the stock market will be strong for years to come.

Technology stocks can’t be ignored I hear, but on the other hand some say that ‘the only safe investment is in cash’.

You might be left feeling a bit swamped, unsure of how to proceed. They’ve each got great arguments and, undeniably, they each know their stuff.

But all these conflicting forecasts and predictions can paralyse you — leaving you on the sidelines, missing out on making the right investments for a comfortable retirement.

On the flip side, the bulls’ enthusiasm for speculative punts might lead you off a cliff. Do you really want to bet your financial security on whether you’ve backed the right forecaster or taken the right macro-economic view?

Well, the good news is, you don’t have to.

In fact, accepting the unknown will make you a BETTER investor.

The truth is that you don’t need all the answers to make great gains in the markets. You don’t have to gamble, or take a view on what lies ahead.

You can ignore the noise. Stop worrying about how fast the economy grows, or if the gold price rises, or if Russia goes to war.

In fact, forming a big picture view can make you a worse investor. Why? Because betting on a certain outcome leaves you open to the possibility of being wrong. And with every passing year your odds of making the wrong bet only go up.

So what’s the secret?
It’s not as hard as you might imagine.

The first step is to only buy the best businesses out there. Those with proven track records. Businesses that won’t be wiped out if the tide turns against them.

Take Kellogg for example…

The cereal maker has been in business for over a hundred years. It’s returned over 1200% — excluding dividends — since it began trading on the NYSE 30 years ago.

It survived the crash of 1987, the terrorist attacks of 9/11, the fallout from the GFC, and even the popularity of grain-free diets.

My point is, great businesses survive and prosper NO MATTER WHAT.

Secondly, don’t mistake uncertainty with the need for ‘safe’ investments.

You don’t need to keep all your money in cash in some bank. Build an investment portfolio that respects the risks and consider all scenarios as possible. Spread investments across different types of assets, industries and countries.

We don’t always know which investments will perform best. And that’s fine. But we do know that different markets and types of investments act in unique ways. And you can EXPLOIT that fact to your advantage.

Consider if interest rates fall, for example.

All else being equal, property values will rise as cheaper mortgages boost demand. But on the flipside, depositing your money in the bank won’t be so appealing.

By spreading your investments across both property and cash, your risk is reduced and you have a chance to earn higher returns. You’re not betting all or nothing on one type of investment.

Now let’s go back to gold. If you have the bulk of your wealth held in gold, I can understand you’re hanging off every word these forecasters utter.

But be aware. This is speculating, not investing.

There’s certainly room for gold and gold miners in your portfolio, but the risk should be offset by investments such as stocks, whose prices tend to move in the opposite direction.

Rather than taking a punt one way or another, you’ll reduce the risk to your portfolio by owning both gold and stocks.

So…what stocks SHOULD you be buying?

This is a topic we’ll be looking at over the next couple of weeks. So keep tuning in!

For now, I want to get the point across that you should focus only on what you can control.

You’ll be less likely to overreact to every tiny signal. So what if China’s economy only grew by 7.4%, when they were aiming for 7.5%! You don’t need to make sense of that. Don’t let what you read in the news stop you from making the right decisions.

It’s all a distraction from your long term goal of protecting and growing your wealth.

Tomorrow I’ll share with you the importance of holding the right balance of investment types.


Meagan Evans
Investment Director, Albert Park Investors Guild

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Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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