April 12, 2007 -To build wealth, you need to buy the right stocks in the right industries in the right countries at the right time. If you ever wonder why the Goldman Sachs or the Merrill Lynches of the world will tell you that timing the market is “impossible” and a “waste of time” or that buying a Chinese mutual fund is the best way to gain exposure to China or diversification across ten different industries is the “safest” way to invest, I’ll tell you why right now.
Before I answer this question, think about what the above three strategies I’ve just mentioned have in common and think about why financial consultants repeat these three strategies over and over no matter if you speak to one that resides in London, Santiago, Paris, New York, Tokyo, Bangalore, or Montreal. All three strategies serve one purpose — to minimize the amount of time a financial consultant actually has to spend managing your portfolio and to maximize the amount of time he or she can be pitching new products to existing clients or prospecting for additional clients.
Financial consultants always cite studies upon studies about how specific stock picking does not factor into the absolute returns of your portfolio. They mention how being allocated in the proper industries and asset classes determines 90% or more of your returns. I liken these claims to the claims in the 1970’s of big tobacco hired doctors that produced “medical studies’ that concluded that there was no correlation between lung cancer and smoking cigarettes. Whose purpose do these illogical claims serve? Yours or the pockets of the firm that you have entrusted with your millions or hundreds of thousands of dollars?
So let’s break down these claims one by one. Let’s look at the issue of market timing. Financial consultants and the economists hired by the large investment firms always claim that since timing the market is impossible that clients for the most part should always be fully invested in the market. They claim that people who periodically jump in and out of the market always perform much more poorly than those that just park their money in the market and weather all the ups and downs. First, let’s begin by being a little bit more specific. The only thing that I think is impossible about timing the market is buying at exact bottoms and selling at exact tops. Other than that, I think that it’s very possible to predict near bottoms and near tops of certain asset classes. In fact, that’s exactly the key to build wealth and the key that the greatest individual investors in the world have utilized — to find and buy asset classes that are poised to skyrocket when they are ignored by the financial media and the masses of investors.
Financial consultants will tell you that this is impossible to do so that’s why they apply diversification to your portfolio because diversification, rather than identifying the best asset classes, requires the least amount of time and effort, and frees up most of their time to engage in the activities that their bosses want them to engage in- gathering more assets. Secondly, gold stocks are a prime example of when just entering the market blindly because “market timing is impossible” is a horrible strategy. With the period of consolidation that had occurred among gold stocks for the last nine months or so, by selling out and taking profits when the gold market appeared likely for a downturn and then re-buying the same stocks at cheaper prices when it appeared likely to recover again, I easily saved many tens of thousands of dollars. This is not extremely difficult to do and it doesn’t even require a great deal of time, but it does require more time than financial consultants have. That’s the only reason they say market timing is not possible and tell you to remain fully invested in the market no matter what the market conditions appear to be like.
And what do mutual funds and diversification sound like to you? If you answered “time saving strategies” you are exactly correct. Buying a mutual fund in China or Japan or Singapore or Australia or Germany takes a fraction of the time it would take to research and find much better individual stocks in all those markets. Diversifying you across six different industries takes perhaps 1/10th the time it would take to determine what the best three industries are out of those six industries and to find the best individual stocks within those three industries. So that’s why these myths are so widely propagated. None of these myths serve your interests. So next time you are deciding how to invest your money, remember the only way to build wealth through investing is to buy the right stock in the right asset class in the right country at the right time (and then of course, to understand when to sell them as well)
[tags]market timing, mutual funds, diversification, investment strategies, wealth literacy,biggest investment myths debunked[/tags]
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J.S. Kim is the Founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.
