A lot of small investors spend a lot of time — far too much — worrying about their investments. They buy concentrated positions in a few shining stars and then hope.
What happens next is all too predictable. One position rises and they pat themselves on the back. Another one falls and they grumble and blame “the market” or some equally nefarious force in the background.
What they never do is blame themselves. No matter how bad the pick turns out to be, any losses must be attributed to the actions of others and never the stock picker.
Then, a familiar pattern appears. Fearful of taking more losses, the investor begins to focus on the losers in the bunch. For a while, the winners offset the losers. Then the paper losses mount and the pressure is on.
Just when things are at their worst — the whole portfolio is negative for the year! — the investor decides to cut his or her losses. The dog gets sold.
Naturally, many of those supposed “loser” stocks soon spring back. The winner stocks of last quarter lose steam, too. The portfolio looks quite different only a few weeks later.
And on it goes, failing to sell a gainer while it’s high enough to warrant it, then failing to hold on to supposed losers until the loss is so bad it must be realized immediately.
The solution, the research shows, is to depersonalize the whole matter. Why pick stocks at all when you can own the whole market?
What the numbers show us that “time in the market” trumps “timing the market” year in and year out. Rather than renting stocks for a short period of hoping for a pop, you own them for years.
Over those years, the dividends pour in at about 2% a year. That money is reinvested automatically. Likewise, earnings growth is steady over the long run, about 5%. This translates into steady appreciation across the whole market.
And, just like that, you compound your money, year in an year out, just by buying and holding stocks. Add that to a portfolio of foreign stocks, bonds, commodities and real estate and you’ll likely do a bit better.
Rebalance steadily as you go and you avoid the worst of the excessive, scary highs and the depressing lows, which can happen and will happen over the years.
Time in the market works because it forces you to ignore your dangerous emotions. We love the idea of winner stocks and want to own them forever. We hate the idea of losing money and will do anything to stop that pain.
The fact is you will experience both emotions. A disciplined portfolio keep us from overreacting and hurting the long-term positive return we all need to retire well.