What kind of investor are you? Do you open your monthly account statements, take a quick glance at the first page to see if you made any money, and move on with your day? Or do you stress over your portfolio’s performance, wondering if things would be different if you’d paid more attention, called your advisor to buy/sell at that perfect time, or put your money into a different sector altogether?
You hear the phrase all the time, that thing they call “beating the market.” And if you’re like most people, you want in on that! Who doesn’t like to make more money with their investments? Here’s the kicker though: Beating the market doesn’t work. Or more specifically, it can work…in theory…sometimes. What won’t likely happen is beating the market over and over again, year after year. Here’s why:
The Behavior Gap:
You may not be familiar with the term, but it’s likely you’ve fallen victim to the Behavior Gap before. Simply put, the Behavior Gap is the tendency to time the stock market badly. More specifically, it’s an investor’s inclination to sell when stock prices are dropping, and buy when stock prices are soaring. Makes perfect sense if you think about it. If you see your stocks in a tailspin, you want to get out. If you see a stock price on the rise, you want in on the action.
The problem with this behavior is that, theoretically, investors should do the opposite. They should sell at the high (you’ve made all the money you can), and buy at the low (it’s a sale!). So the question becomes: When is that? Nobody truly knows the answer. And all the buying and selling at the wrong times means investors, like yourself, can lose out on the potential for significant returns over the long term.
Outperforming year after year is very unlikely:
Now active money managers love talking about all those great years they had in the market. You’ll be shown lots of fancy charts emphasizing their fund performance. What’s often missing from the conversation is the chat about those years where the numbers weren’t so stellar. Or the years when their managed portfolios just did the same as the market as a whole. Those years matter too. They matter a lot.
Active portfolio management is also costlier to the investor. Between the transaction costs and management fees involved with an active strategy, it’s often difficult for a manager to outperform their respective markets on a consistent basis. Is it possible? Sure. Likely? Meh.
Our two cents:
We approach investing differently. Our philosophy is simple. Keeping the costs low and the investment management passive will set you on the path to achieving your goals. Invest your money with a long-term outlook, take what the market gives you, and keep on keeping on. You have no control over the market, yet complete control over following your financial plan.
A change in perspective can go a long way to setting your mind at ease about the stock market. Don’t stress about the stock market’s ups and downs, which you can’t change no matter how hard you try. Instead, pay attention to what you can! The real factors that will dictate your financial well-being years from now are these:
- How much you spend
- How much you save
- Having a financial plan
- The level of risk you take on in your investments
Focus on these things and don’t be afraid to be average in the financial world. Be in it for the long haul, do what you do and let the market do what it does. As always, if you have any questions or would like to dive deeper into your personal situation, just reach out.