I was reading an old article titled False Profits by Jason Zweig here when I felt that it made sense to be shared with the reader here.
So allow me to share parts of the article. I am sure you will understand why I felt like sharing it:
Note – The text in italics is taken exactly from the article.
Everywhere you turn, someone is selling investment hogwash: seductive-sounding ideas that will supposedly enable you to beat the market and buy a tropical island with the proceeds.
In the past year or so, many investors’ minds have been hijacked by these false beliefs…
More than ever, people think the test of an investment’s validity is whether it “worked.” If they beat Standard & Poor’s 500-stock index over any period, no matter how dumb or dangerous their tactics, people boast they were “right.” But investing successfully over the course of a lifetime has nothing to do with being right in the short term. To reach your long-term financial goals, you must be sustainably and reliably right. While the techniques that are so trendy now – day trading, ignoring diversification, flipping funds, following “systems” – may seem right on a given day, they slash your odds of being right in the long run.
Imagine that two places are 130 miles (or 210 kms) apart. If I observe the 65-mph (105 kmph) speed limit, I’ll drive this distance in two hours. But if I go 130 mph (or 210 kmph), I can get there in just one hour. If I try this and survive, am I “right”? Should you be tempted to try it too because it “worked”?
The flashy new ideas for beating the market are much the same: In short streaks, if you’re lucky, they will work. Over time, they will get you killed financially.
Let’s keep this post short.
Unless you are professional investor whose sole aim is to maximize returns by taking large risks (which can blow up in the face), you are better off following investment strategy which doesn’t take unnecessary risks and focuses on increasing the odds of reaching your financial goal, i.e. having right amount of money at the right time of your life.
There are several high-risk strategies (like this) that are unsuitable for common people. But greed (and glamour) gets the better of them. Most people are much suited to follow a simple Goal-based Investing philosophy. All else is noise.
By the way, you may ask as to why am reminding you all of the downsides of high-risk strategies (just like driving fast) when your portfolios are already down due to poor returns (and big crashes in non-large-cap space) in the past year or so?
It’s because you won’t listen to me when things are going good. Isn’t it? 😉
Loved the closing paragraph on this post. Unfortunately in most cases, human behaviour will still end up ignoring this (not so common sense ) advise.