401ks,  Return on Investment

A Better Approach to Financial Planning

I said it last week. I’m going to say it again.

Do not lower your expectations as an investor.

Did the Great Recession leave you wary? Most likely. As you evaluate your portfolio and establish your goals, you should consider on what your portfolio is based.

Many financial advisors build their client financial plans using software that forecasts that stock market returns vary according to the normal distribution (that so called “bell curve”). As a mathematician, if it was true that market returns followed this curve, it would be an easy format to use. Typically, distribution curves are predictable. Unfortunately, stock market returns are not nicely grouped in a bell shaped curve. The bell shaped normal distribution forecasts that stock markets would move in small steps. Mark Rubinstein and a UC Berkley colleague calculated the likelihood of a market drop such as that of October 19, 1987 would only happen once every couple billion years if the stock market actually followed the normal distribution.

I believe in keeping a pulse on the market. This type of investing is a two-step process. First, you need to identify companies which are based on successful characteristics such as innovation, strong leadership and a focus on quality.

Second, you need to follow them closely. Identifying and investing aren’t enough. Buying and shelving stocks will not work. Rather I believe in an attentive, intelligent, and deductive approach to investing. Watch how the companies you are invested in grow and how they handle setbacks. Evaluate how they maintain their cutting edge technology. It is up to you, or your financial planner, to keep a current pulse on the market.

 

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I want to hear your opinions; please leave a comment below and let me know your thoughts.

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