I don’t make it a habit of watching 24/7 financial news, but I found myself tuned into one of the financial networks on the day before Christmas Eve. In a scant twenty minutes, I figured out why individual investors underperform the market averages.
The programming was unremarkable, a standard panel of investment experts – all individuals who manage money for a living. The focus was on the prospects for retail stocks, but a discussion of overall market valuations ensued and a statement by one of the “experts” captured my attention. “How comfortable can you be putting new money into the market when you have hit 15 or 16 new highs? It’s crazy. You have to have a death wish or not care about your capital to put money in the market at this point.”
The ensuing dialogue focused on the fact that the market was up over 9% in the last month and one panelist posited the question “how many months since 1983 had the market advanced over 9% in a single month?” The insinuation was that such strong monthly performance was an anomaly and must be followed by poor performance. While they did not answer this query, I found that since 1983 there have been exactly eight calendar months in which the S&P 500 advanced more than 9 percent. Further, in the month immediately following those outsized gains, the market returned on average 0.72 percent – or 8.64 percent annualized. The historical evidence simply does not suggest that an immediate pullback follows a big month or that there are any easily identified patterns.
I certainly have no death wish and I do care very much about my capital. My belief is there is no time like the present to invest if your time horizon is long. Investment success is a marathon and not a successive series of 100-meter dashes. Individual investors would be wise to simply tune out all of the investment noise and play the long game. A sure way to underperform is to regularly move in and out of the markets. One has to go no further back than early November when the majority of experts were calling for caution in advance of the election. The fear was a negative equity market response to a possible Trump victory.
While boring, long-term success is achieved by dollar cost averaging into a diversified equity index. Since 1926, a diversified portfolio of stocks has returned, on average, 10 percent annually. A diversified portfolio of small stocks has returned 12 percent. People would be much wealthier if they simply embraced the old investment adage “time in the market is more important than timing the market.”
By the way, the commercials offered no reprieve from bad investment advice. My favorite was the grandfatherly looking man peddling a trading system that he claims turned $4,600 in capital into $460,000 in profits in two years. If building wealth were only that easy.