The following blog post is an excerpt of the WorthPointe e-book, The Informed Investor. We created The Informed Investor to show you a Nobel Prize–winning approach crafted to optimize your investment portfolio over time. We have designed it specifically to not only support you in your efforts to preserve what you already have, but to also efficiently capture the market’s returns for your investments. Receive a complimentary copy.
Some investment professionals work hard to make their work confusing. They believe they have a vested interest in creating investor confusion. They use jargon that can intimidate and make it difficult for you to understand relatively straightforward concepts.
But investing is actually not that complicated. It can be broken down into two major beliefs:
You believe in the ability to make superior security selections, or you don’t.
You believe in the ability to time markets, or you don’t.
Let’s explore which investors have which belief systems and where you should be with your own beliefs.
Exhibit 1 classifies people according to how they make investing decisions. Quadrant one is the noise quadrant. It’s composed of investors who believe in both market timing and superior investment selection. They think that they (or their favorite financial guru) can consistently uncover mispriced investments that will deliver market-beating returns. In addition, they believe it’s possible to identify the mispricing of entire market segments and predict when they will turn up or down. The reality is that the vast majority of these methods fail to even match the market, let alone beat it.
Unfortunately, most of the public is in this quadrant because the media play into this thinking as they try to sell newspapers, magazines and television shows. For the media, it’s all about getting you to return to them time and time again.
Read the full chapter in The Informed Investor.
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