Every time stock markets tank, you can count on the same set of reactions. People question fees. If the investors had an adviser, they consider doing it themselves. If they were doing it themselves, some consider going back to an adviser. And invariably the debate of whether or not “this time it’s different” is brought up, which is code for asking if they should change their strategies.
Many investors in Canada use a buy and hold strategy. Whether that means buying individual stocks, bonds, mutual funds or ETFs, the idea is to weather the storms by sticking with a well-diversified portfolio.
And every time a market correction occurs, people start to second-guess themselves. If the market declines are small, usually it’s not an issue. Once we get to a 10 per cent decline, more people start asking if they should get out while the getting is good. Bear market territory (which is a 20 per cent decline from the previous peak) gets the crazies out. All of a sudden, market timing seems like a good idea.
The fact that the market has already fallen should be proof enough that you have no authority to suddenly become a market timer. If you were good at it, you would have taken your money off the table before the decline.
Not only would you have to get the exit right, you would have to gauge the re-entry and buy back in when the market reaches its lowest point. While everyone knows they should buy low and sell high, the lower prices drop, manybail on that strategy and essentially turn into buy high, sell low investors.
People label you a contrarian if you want to buy when everyone else is selling. How paradoxical is that?
The truth is, a well-diversified portfolio backed by an investment policy statement is going to be the most prudent approach to investing for the vast majority of people. But as the markets decline further and more and more people start asking if there is a better way, let’s put trading and market timing into context. Barry Ritholtz, CEO and director of equity research at Fusion IQ, believes the odds of becoming a successful trader are similar to becoming a professional athlete.
Citing some basketball statistics on his blog, www.ritholtz.com, not everyone makes the high school basketball team. Of the few that do, only 3 per cent of those high school players make it to the college NCAA level. Only 1.2 per cent of players make the next step to the professional ranks. This works out to 0.03 per cent of high school basketball players in the U.S. making it up to the NBA. He believes the success rate of traders is roughly the same.
With both trading and professional sports, there are some commonalities: dedication and long hours. The likelihood of a regular investor dumping their prudent strategy to try to beat the markets consistently over time through market timing and trading is about as wise as the average person dropping their careers to take a shot at making the NBA.
While clearly there are exceptions in both cases, they say white men can’t jump and I say most people can’t trade.
Preet Banerjee, BSc, FMA, DMS, FCSI is a W Network Money Expert, and blogs at wheredoesallmymoneygo.com . You can also follow him on twitter at @PreetBanerjeeReport Typo/Error