Everyone has heard “past performance is no indication of future results.” But when it comes to investing what does that really mean? And, how can you use that understanding to protect and grow your nest egg?
Being a smart money manager is like planning your route to the airport
Let’s say you need to get to the airport to catch a flight, and you are not sure how long it will take. You call a friend, and she says, “In the past it has taken me anywhere from 30 minutes to two hours.”
That is somewhat useful. But it is an awfully wide range, it is based on what has happened in the past, and isn’t really useful for making a plan to get to the gate on time today.
That’s when you open your mapping app that uses the latest traffic and weather conditions to let you know almost exactly how long it will take to get to the airport *now*. Current information about current conditions give you the best opportunity to get to your plane on time.
A smart money manager doesn’t worship past performance
Investing is similar. To be a great money manager, you should know that the past is a good rough guide. It gives a range of what you might expect. But over focusing on the past can lead you astray.
Look at the example of what happened to Blackberry and Apple. In the mid-2000’s Blackberry was the smart mobile device of choice. They were an innovative and highly profitable company and they ruled the smartphone space.
Apple was down on its luck and an afterthought. Then came 2007 and the iPhone. The world changed almost overnight.
Seven years later Blackberry was struggling to remain competitive, losing over 4 million subscribers in the first quarter of 2014. The share price of their stock shrank while Apple became a global phenomenon.
The point is there’s no guarantee that today’s market leader will continue to dominate and provide strong investment returns. That’s why, in order to be a smart money manager, you don’t put as much stock (sorry, I couldn’t help myself) into past market performance.
The past is a great guide but it doesn’t paint the full picture
Here’s what smart money managers know about the past:
- Stocks will generally outperform bonds over the long term.
- Small company stocks will generally outperform large company stocks over the long term.
- Value stocks will generally outperform Growth stocks over the long term.
- International stocks are a good diversifier because generally they don’t rise and fall at the same time as U.S. stocks.
But if you rely only on the past, you might be led astray. Just as if you tried driving your car while looking in the rear-view mirror.
Instead, using the most current information typically leads to more sensible decisions. Not what the market did or will do, but what is happening right now. This is how to be a smart money manager every day. And it gives you a much better chance of getting where you want to go with fewer surprises.
Use an independent financial advisor as your guide
There’s no need to steer down that road alone and risk missing some excellent investment opportunities. You can partner with an independent financial advisor, who is required to put your best financial interests ahead of all other considerations.
Get Started Today
Financial planning, like everything else, is easier when you have an experienced guide to show the way. Let us be that guide. Reach out today and find out how to get started. You deserve to retire comfortably. You deserve to be confident that you’ll have enough money to buy everything you need for a lifetime.
