For many of us the fluctuations in the market drive us crazy. We look at our 401(k) statement and feel great when it’s up and feel frustrated when it declines. Others feel they can pick their own stocks to beat the market thinking they can do the same because a friend or neighbor is doing so. Emotion plays such a huge role in our decision process which typically affects it negatively. I am piggy backing a post written earlier by Roger Wohlner called “Investing is Not Sexy.” Investing should not have a sex appeal nor should it be entertaining. Investing is a small piece of the financial planning process to help you achieve your goals. It should be unattractive and boring.
We all like making money but it feels even better when we can outsmart the brightest minds of Wall Street. That friend or neighbor keeps making great stock picks, so what is the secret? I hate to break it to you but the only secrets are the stocks they lose on. The proof is in the pudding. Tom Anderson of Forbes dug into the study published by DALBAR, Inc., and reported that most individual investors perform worse than the S&P 500. This Boston based firm provides research to companies in financial services industry published a study called “Quantitative Analysis of Investor Behavior.” The study compared the performance of the average investor in equity mutual funds with that of the S&P 500 index for the 20-year period between 1993-2012. It showed that the average equity investor merely earned 4.25% while the S&P 500 gained an annual return of 8.21%.
What about the “gurus” on TV? Suzanne McGee of TheGuardian.com wrote about CXO Advisory Group’s study on stock picking guru’s. Sixty-eight stock gurus were studied and found that only 24 of them had been more than right half the time from 2006 -2012. But wait, what about Jim Cramer?? (Jim Cramer is the host of “Mad Money” on CNBC). He actually was right only 46.8% of the time. So why are these talking heads still on TV? Well it’s the entertainment value. Some people love watching Jim Cramer yell Boo Yeah! into the TV.
How should you approach investing? First, come to the realization that portfolio returns are not determined by what stocks you pick but rather what asset classes will perform better in a given year. Second, develop a game plan for your asset allocation (i.e. % of equities vs. % of fixed income) and then decide on what asset classes you want to own (U.S. equity, International equity, real estate, bonds, etc.) and the percentage of each. Each year take a look at your portfolio and rebalance back to your original asset allocation. It may seem counterintuitive to sell the performing funds and buy the underperforming ones but this will help create a system where you are buying low and selling high. It is tough to get over this mental hurdle but this is the easy part. The hardest part comes from Roger Wohlner’s piece where it takes persistence and commitment.