Turn on cable TV news at any given moment during the business day and you will be inundated with investment recommendations.
Buy stocks, sell stocks. Buy bonds, sell bonds. Avoid both stock and bonds and load up on real estate, or commodities, or something else entirely.
Or, sometimes, you get told to go to cash. Sell everything and wait for a new opportunity to buy.
It all sounds pretty convincing. After all, these are guys in red neckties on TV with impressive titles and smooth haircuts. Surely they are successful investors or they wouldn’t get the airtime they get, right?
Nevertheless, the data suggests that trading is wasted time and, worse, a high risk endeavor. Over the years from 1997 to 2016, a portfolio of all stocks return 9.7% annually to investors, according to JP Morgan.
An all-bond portfolio returned 5.3% and a portfolio that was 60% stocks and 40% bonds returned 6.9%.
Meanwhile, the “average investor,” meaning the type of person who attempts to buy and sell investments all the time, did much worse. That person saw an average return of 2.3% over the same period.
The reason why is market timing and returns chasing. That is, trying to get into an investment while it’s “hot” and then getting back out before everyone moves on.
Market timing is why some parts of a portfolio do better than others during any given period. Investors see the rising return and pile on.
Pretty soon, the return feels out of whack with the underlying reality and investors begin to sell. A mass exodus begins. Too often, the inexperienced investor is the last to leave the party.
Chasing the hot stock, the hot sector, the hot investment of the moment is how individual investors lose money.
The answer is to settle on an asset mix that matches your long-term goals. If you think you need to grow you money for years to come, a mostly stock portfolio is likely to create that outcome.
If you need your money in the short run, in less than a few years, or you need income from your investments, then bonds likely are the better choice.
Keeping that steady asset mix is the point of investing. Otherwise you can end up chasing returns and getting burned.
As you get older, that mixture might change. Many automated funds, known as target-date funds, start out with a more aggressive mix and then, year by year, move toward a conservative bent.
The trick is to stick with the plan and avoid the temptation to outguess the whole stock market.
You might get it right once in a while, but you’ll get it so wrong so much of the time that your returns in time will look more like the “average” investor — sad indeed.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.