Investing in the Age of Information
The average investor has more data and information available at her fingertips today than entire investment departments had twenty years ago. The Internet and software has opened the floodgates and unleashed more investment information to you, the consumer, than we’ve ever had access to before in our history. Do you want to research a mutual fund? Do you want to know the gross revenue of a company? Do you want to compare the performance of all large cap mutual funds for the last 12 months? What about finding out what the top investment analysts think about Microsoft? How much did the economy grow last quarter? What was the most recent unemployment rate? The answers to all of these questions and thousands more can be answered within seconds for free.
“Surely the availability of this free or inexpensive information means that we have become better investors.”
In addition to the millions of pages of free financial information on the Internet, today there are multiple stock exchanges, dozens of electronic exchanges, thousands of stocks and mutual funds, after-hours trading, international trading, a never-ending assortment of new investment products, and more personal finance and investment books, magazines, and TV shows than ever.
Surely the availability of this free or inexpensive information means that we have become better investors… If information is power, we should be able to make smarter investment decisions in less time and feel less anxiety.
But what if the promise is wrong?
What if all of this information doesn’t make you a better investor? Worse yet, what if this supposed information elixir is actually making matters worse? What if all of this information is making you a more nervous, apprehensive, and worse investor?
Ask yourself if you feel less worry and doubt about your finances. Has your investment performance improved? Are you able to make investment decisions quicker, easier, and with less anxiety as a result of the information available? Or does it take you longer to make investment decisions? Do you sit on cash because you’re not sure what to do with it? Are there too many choices? Do you feel overwhelmed? Don’t feel bad if you do, it’s not your fault.
Einstein was a pretty smart guy.
Not only did he say compound interest was the most powerful force of the universe, he also said we should try to make things as simple as possible, but no simpler. Investing today is not as simple as it should be though. We’ve made it more confusing and complicated than it needs to be. The way we invest today is both counterintuitive and counterproductive. I don’t believe in fixing something unless it’s broken. Unfortunately, the traditional method of investing isn’t intuitive and it just isn’t effective.
What’s wrong with how we currently invest?
- It’s overwhelming. We are programmed to think that more information is better, so when we feel overwhelmed and paralyzed, we seek more information. Unfortunately, the more informational “noise” we receive, the more overwhelmed we feel. Ultimately, many people give up and stop investing because it requires us to make too many complicated decisions.
- It’s confusing and complicated. Even if we haven’t gone through the process of putting our goals on paper, we know we have a number of different goals that our investments are supposed to meet. Even though we have multiple objectives, the traditional method of investing lumps all money into a single investment account. If all of your investments are in one or two investment accounts, it is very difficult to know if you are on track to meet your goals or if you need to make changes.
- There is no rationale for investments or allocation. Most people who review the investments in their account find that they have no overall investment strategy. Most are filled with a hodgepodge of mutual funds and stocks bought with good intentions or a recommendation, but are not part of a planned investment strategy.
- There is too much risk. The investments we choose and the investment allocations we create usually do not reflect both short-term and long-term goals. Investing for short-term goals requires more conservative investments, while we can invest more aggressively for long-term goals; but because all of our goals are lumped together in one or two investment accounts, we tend to take too much risk with our short-term investments and too little risk with our long-term investments. As a result, we can jeopardize reaching both our short-term and our long-term goals.
- You waste time sitting on the sidelines. Since we don’t have a pre-planned investment strategy, anytime we have money to invest, we start from scratch. Not only is this frustrating and time-consuming, but you can miss out on opportunities while you are trying to figure out what to do with your money.
- It takes too much time to create and monitor investments. The traditional method of investing takes a lot of time to develop an investment strategy and monitor since all investments are in one or two accounts.
- All goals carry the same weight. Your goal to take your family to Italy next year, your goal to send your kids to college in five years, and your goal to buy a new sports car all carry the same weight when your investments are lumped together.
For most people, investing is not fun, rewarding, or exciting.
We naturally think about what our investment success will help us achieve; it will help us send our kids to college, plan for a comfortable retirement, buy a vacation cottage, and buy a new car. But even though we have dozens of goals with different time frames, priorities, and risk characteristics, we often just have one or two investment accounts that are supposed to satisfy all of our goals. In addition, we make short-term decisions based on unimportant information and we don’t stick to an investment plan. Or worse yet, we throw up our hands in frustration from too many choices and information overload and don’t do anything.
The way we currently invest is broken, but we’re going to fix it! Stay tuned for the next lesson!
The proceeding blog post is an excerpt from The Six-Day Financial Makeover: Transform Your Financial Life in Less Than a Week!, available now on Amazon.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.