We all have emotions. So I’m sure that you enjoy watching your portfolio when it goes up in value, and then get nervous when markets go down, or when there is a lot of bad news in the media. Like you, I would love to find some way to “lock in” my gains when my portfolio goes up, and then do something to avoid my portfolio going down in value. Can this be done?
If you watch CNBC or other financial TV shows, you will see many investment “gurus” who claim they know where the market will go next week (or tomorrow, or over the next year). Many of them claim that they have predicted major market moves, both up and down, so it is only normal to sometimes wonder if you should do what they recommend. They usually sell software or newsletters that offer “secret” or “proven” methods of tracking the market, to give you signals when you should buy and sell.
First, understand that making short-term changes like that is not “investing.” That is speculative “trading.” Being a good investor requires taking a long-term view of the markets, structuring a portfolio to meet your specific goals and risk tolerance, and then avoiding making emotional decisions. For example, DFA Funds did a study in June 2006 on the performance of the S&P 500 from January 1970 to December 2005. Over those 36 years the S&P 500 averaged 11.1% per year. If an investor had missed only the 25 best days over those 36 years, or less than one day each year, their return fell to only 7.6% per year. Please see the below graph for more details.
It is important to remember that while volatility may be uncomfortable, it is also an investor’s friend. Indeed, it is essential to your long-term investment success. And if you are honest with yourself, you would admit that you like upside volatility – you just don’t like downside volatility.
Please understand that if stocks always went up and there was no risk, returns on stocks would shrink to those earned on “safe” investments like CDs.
And think about this as well – how would you feel if every morning, when you left your home, you saw a sign in front of your house saying what your home was worth that day? Especially during periods where your home’s value goes down for several months or even years? Would you want to sell your home just because it went down in value 6 months in a row? This is why some people are much more comfortable with their investment portfolio when they only look at their quarterly statements, rather than checking the paper every day.
Oh yes – before I forget. How about those gurus that you see on TV, or those who sell market timing newsletters or software promising that you will make money whether the market goes up or down? How have they really done? Not very well.
The Hulbert Financial Digest tracked the record of 103 market timers over the last ten years. Only ten of those 103 market timers even beat the S&P 500 over those ten years. And in 2006, only four of them beat the S&P 500 Index. So much for their claims of predicting the future and superior performance. (Business Week, 2/19/07)
All investments involve risk, including loss of principal. Returns include reinvestment of all dividends and capital gain distributions. S&P 500 Composite Index is an index run by Standard & Poor’s that is designed to represent the 500 largest U.S. companies. Indexes are unmanaged baskets of securities that investors cannot directly invest in; they do not reflect the payment of advisory fees or other expenses associated with any specific investments.
WORDS OF WISDOM
When you don’t get what you want, what you get is called “experience.” Use it to improve your future.
