Where does value come from?

For many investors the world of finance may seem foreign and complex but understanding it on a conceptual level shouldn’t be. It is common to watch the news or to meet with a Financial Advisor and hear all kinds of words and phrases that try to describe why certain price movements happen within a particular investment. The fact is, 99% of everything you hear is conjecture and shouldn’t be given much, if any thought.

When you invest in a portfolio of stocks or bonds, you are giving your money to companies and organizations that need it to grow. This helps them invent new technology, create more jobs, and offer their goods and services to more people in the world. Investing truly is a great thing because it makes the world a better place. The common misconception is that some type of a forecast is needed to earn a desirable rate of return on your investment and that a professional money manager who can consistently do this is needed to add that value to your investment portfolio. However, evidence shows that this couldn’t be further from the truth. Countless research shows that professional money managers cannot consistently predict which stocks and bonds are going to do well or poorly in the future, and their attempts to do so consistently reduce the rate of return their investors receive from their investments.

The reason for this is simple – professional money managers cannot see the future. So where does the rate of return or value come from in your investment portfolio? It comes from the companies themselves that your portfolio is invested in. As they grow, your money grows with them and they create the value in your portfolio. Evidence shows that investors who buy and hold an efficiently diversified portfolio that represents different categories of the stock and bond markets consistently earn a higher rate of return than an investor in a fund whose manager tries to predict what will happen in the future.

So, the next time you see someone on the news telling you why you should buy or sell a particular investment, just remember, their job is to sell advertisements.

 

Aaron B. Davis

Investment Advisor Representative

 



Leave a Reply