3 Misconceptions of Investors With No Strategy
If you’ve ever taken a long trip, you know the benefits of having a road map. It tells you how to reach your destination by using the most efficient routes, while also anticipating any possible detours along the way. Well, a good financial strategy is much like a road map. You set your goals, and you tailor your strategy to help you reach those goals. If you don’t have a strategy, you could wind up off course, or worse, relying on generic advice and bad ideas. This can be disastrous. Here are three misconceptions of investors who have no strategy whatsoever.
The first one is “I can time my way in and out of the market.” Trying to guess the market highs and the market lows, and then making bets with your retirement money based on those guesses, is simply a fool’s game. Jack Bogle, who is the founder of Vanguard, once said “I don’t know anyone who’s got it right. In fact, I don’t know anyone who knows anyone who’s ever got it right.” A couple of years ago, Morningstar published some data where they looked at the US equity market performance from 1995 to 2014. What they found was that if you were out of the market on the 10 best days of performance, your returns would be reduced from 9.9 percent per year to 6.1 percent. If you missed the 20 best days, your returns would drop to 3.6 percent. That’s 20 days out of 20 years! Market timing may be tempting, but it’s not a way to achieve long-term success.
Misconception #2: “The best performing funds will continue to be top performers.” This is what’s known as chasing yield, and it’s one of the most damaging investor behaviors out there. Many studies conducted by Dalbar and Morningstar and others have shown that in most asset classes, the top-performing stocks and funds during one period tend not to repeat as top performers in subsequent periods. Here’s a stat for you – BTN Research found that the number 1 performing individual stock in the S&P 500 in 2015 had sunk to number 481 by August 1st of this year. The lesson here is that past performance is never a guarantee of future results. It’s much better to have an educated point of view about current and future performance.
Misconception #3: “Index funds are always safer than actively-managed funds.” This simply isn’t true. In some cases, index funds may carry greater risk than actively-managed funds in certain sectors of the market. You know about the European Debt Crisis. According to ThinkAdvisor, back in 2010, widely used indexes had substantial exposure to Spain, Italy, Ireland, Portugal and Greece. Of course, we know what’s happened in those countries since then. We believe that active managers are much better positioned to manage risk because they can assess the creditworthiness of different companies and countries which is something that indexes, which are blind to these bubbles, cannot do.
People with good financial strategies tend to avoid these bad ideas and misconceptions. Conventional wisdom and generic advice is very often wrong, and bad behavioral tendencies can lead you down the wrong path. That’s why working with a team of financial advisors is so important. Your situation is different from everyone else’s, and your financial plan should be a reflection of that. Forget generic advice – let’s talk. Give us a call. We’re here to help.