You know that old saying about what happens when you assume?

Typically, bad things occur when you make certain presumptions based on incomplete information. While you can often stumble upon a positive outcome based on a lucky break, taking steps to insulate your investment strategy against common assumptions can enhance your chances for success.

Assuming An Advisor Has Your Best Interests At Heart

There are all different types of investment advisors out there and (shockingly) not all of them have your best interests at heart. Many times advisors are motivated by financial considerations to place you in high fee mutual funds, annuities, or illiquid assets such as a private REIT. There are billions of dollars languishing in these types of products and they are typically “sold” rather than “bought” by consumers.

Unscrupulous advisors place a higher priority on their own compensation rather than the best interests of their client. This leads to a conflict of interest that can easily be identified by asking the right questions (see here) about compensation, transparency, and liquidity.

Don’t get me wrong, everyone in the investment business is motivated and/or biased in one way or another. Even fee-only advisors, like me, are motivated to attract and retain clients as a primary source of revenue.

Rather than being overly trusting that someone has your best interests at heart, start out every new relationship with a thorough understanding of their investment philosophy, fees, motivations, and scope of authority. That way you aren’t caught off guard or find yourself in an uncomfortable position that is costly to exit and damages your trust in professionals that do place your interests first.

Assuming This Time It’s Different (Or The Same)

As much as we like to study history and make comparisons to other time periods, every situation is unique. Nothing is going to happen the exact same way, nor is a certain pattern going to change based on your one-sided analysis. There are a million moving parts to every single trading day that continues to evolve with the advancement of technology and psychology of investors.

That is why it is so difficult to predict specific outcomes such as tops and bottoms. No one knows how each situation is going to play out and anyone that does so with conviction should be viewed with skepticism. All we can do is play to our strengths in a specific investment plan and make adjustments as necessary to parry risk or take advantage of new opportunities.

Assuming Markets Are Logical And Efficient

One of my favorite sayings is that “markets are not logical; they are psychological”. All the time you spend trying to figure out why something happened is typically wasted energy. There are certain correlations that are worth noting, but by the time you realize why something happened, the move has probably already been made. In addition, the mainstream explanation may not even make any sense based on your existing knowledge and macro outlook.

In my opinion, its far more important to focus on the things that you can control such as your security selection, position size, stop losses, management fees, and overall asset allocation. These should line up with your investment philosophy, risk tolerance, and objectives.

Assuming You Have It All Figured Out

If there is one constant in the financial markets, it’s that change is happening. If you hit it out of the park one year by picking all the top stocks, chances are you are going to be overly concentrated in all the wrong areas before you know it. Nothing lasts forever and overconfidence in a specific outcome or theme can be a costly mistake.

There is no such thing as a perfect investment strategy. Every method will eventually come under fire during challenging circumstances that test your resolve. The key to overcoming those difficult times is understanding the strengths and weaknesses in order to avoid making a bad decision at an inopportune time.

That is one of the reasons why diversification through low-cost exchange-traded funds has become such a popular way to invest. It allows you to easily spread your risks over multiple asset classes and tailor your portfolio to an objective that suits your needs.