An investor’s ability to successfully utilize the stock market as a vehicle for long term wealth accumulation is highly dependent on their own behavior. Bad decisions lead to bad results, aka – a behavior gap. Good decisions allow an investor to capture much of what the market will ultimately give them within their risk constraints.
When making an investment decision, investors have the ability to evaluate a manager and their strategy from a leading AND lagging standpoint. The combination (notice I said AND in the previous sentence) should be evaluated, and more importantly, understood. Unfortunately, many investors focus only on lagging indicators (performance) and skip the whole understanding part. This approach leads to performance chasing and many other behaviors that increase a behavior gap and decrease investment success.
Leading indicators are much more critical as they ultimately determine lagging results. Process is the leading indicator that should be evaluated and understood. As an investor, do you understand the how and why behind how your money is managed? If you do, and that process is supported with evidence and research, you are setting yourself up for success.
Investment strategies and the mangers of them, that execute a sound process should benefit from the market’s ultimate direction. The ride from point A to point B (assuming that distance is long term) should be sufficient and attractive from a wealth accumulation stand point….but, the strategy or manger’s return is not what’s important. What’s important is your ability to participate fully in that ride. Who cares what a strategy returned if you didn’t get to experience it. All investment styles will go through rough patches. Your understanding of process dictates your ability to stick with it. If all you do is evaluate a performance number and have no understanding of the how and why it is what it is…you will find yourself in a continual and futile search for something better.
We urge investors to know the lagging indicators but understand the process that drove them and will also drive the future lagging results. Look for transparency, not black boxes. Lower fees are better than higher. And remember – Simple Beats Complex.