Stock Trading Won’t Make You Rich, Financial Advisors Have A Strategy
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When the Dow Jones Industrial Average fell below 20,000 at the height of the pandemic panic in March 2020, many investors and others assumed the worst. People I know have tinkered with their retirement assets, transferring most of them in cash. Others have put their normal investment contributions on hold in favor of staying tight. Maybe more pain was yet to come, and waiting for it might protect against even more loss later in the year.
But, a lot of people didn’t do anything, so they never realized a loss at all. In the meantime, the stock market has recovered, and then a bit since those dark days in March and April of last year.
At the time of this writing, in fact, the Dow Jones Industrial Average is well above 34,000 and the S&P 500 is well above 4,000. It just shows that a lot of the time the best. investment strategy is to do nothing at all.
It also proves that market timing doesn’t really work, something index fund investors like me have known all along. Why is trying to time the market a bad investment strategy? Financial advisers explain.
Markets grow over time
Unless you are planning to retire in the near future, you don’t have to worry too much about how your investments move on any given day. According to Colorado financial adviser Matthew Jackson of Solid Wealth Advisors, this is because markets are used to going nowhere but rising over time.
“Despite two world wars, a great depression, many regional wars, a presidential assassination, the 1987 Black Monday, the 2000-2001 tech bubble, the 2008 market liquidation and the COVID pandemic, the stock market continued. to grow in value, ”says Jackson. “If an investor had waited for better times to invest, this person might still be waiting.”
The best investment plans are boring
Chicago financial advisor Christopher Clepp of the Strategic Financial Group says the biggest problem you can have with speculative investments is that they can become the target of your investments.
“If the basis of your retirement plan is those same YOLO stocks, then you are playing too much with your future,” he says.
Instead of worrying about the next big thing, Clepp says you should take care of the basics of investing. In essence, this means making sure you have a comprehensive financial plan in place with the right asset allocation for your risk tolerance and time frame.
“It might not sound fun or glamorous, but good financial planning rarely is,” he says.
No one has a crystal ball
Wouldn’t it be nice if you could get a glimpse of the value of your favorite investments in five or ten years?
If you could, you’ll know for sure whether you need to stay on the path you’re currently on, invest as much as you can, or sell and cut your losses now.
Unfortunately, this is not the reality.
Financial advisor Christopher Struckhoff of Lionheart Capital Management in Orange County, Calif., Says people in general are not good at synchronizing the market because it ultimately involves predicting the future.
“And no one can predict the future perfectly,” he says.
To win at market timing, you have to buy and sell your investments at the perfect time. Without a crystal ball, it’s almost impossible to buy or sell at the right time, let alone both.
Transaction costs add up
Struckhoff also points out that active trading increases transaction costs, even on free trade platforms that use payment for order flow where you may not be getting the best price execution. Not only that, but how much of your returns do you keep after paying taxes (assuming you invest in a taxable brokerage account)?
Struckhoff points out that investments held for less than a year require you to pay taxes on short-term capital gains, which are much higher than long-term capital gains. If you are constantly buying and selling, you could increase transaction costs and your tax bill throughout.
‘All-time highs’ don’t mean much
Prosper Wealth Management financial advisor Tony Liddle says too many people wait to invest because markets are approaching all-time highs or they believe they are overvalued. The point is, it’s not uncommon for markets to hit or linger near all-time highs, but each new threshold hit is yet another all-time high you’ll see in the news.
To put it in perspective, the Dow Jones first hit 30,000 in November 2020 after the pandemic, but has risen more than 10% since then. If you had waited to invest in November because of the new high, you would probably still be waiting on the sidelines, and you would have missed out on generous gains to boot.
When it comes to overvalued markets, Liddle also says the markets are still overvalued to some extent. On March 23, 2020, for example, the S&P 500 hit its lowest level in four years because we were at the start of the COVID-19 pandemic.
“Many viewed the market as overvalued because you couldn’t accurately project the future earnings of companies in the market,” Liddle says. As of that day, however, the market is up over 80%.
Even the ‘experts’ fail to time the market
Financial advisor Loren Sherman of Integrity Wealth Management says that to beat the market you have to “be smarter than high-tech computers working 24/7, making decisions in thousandths of a second all day long. . We also need to be smarter than the expert investors brought in by the big investment firms, as well as the mutual fund managers who are trying to make the market their work of a lifetime.
But even for people who invest in their work, market timing rarely works for long. In fact, a study by the American Enterprise Institute (AEI) shows that over a 15-year period, 92.43% of large-cap managers, 95.13% of mid-cap managers and 97.70% of mid-cap managers small caps have not consistently outperformed their benchmarks.
What to do instead of timing the market
While buying low and selling high seems like a solid investment strategy, most of us don’t have the knowledge or the time to move forward consistently. Financial advisor Jeff Rose of Good Financial Cents also points out that most people don’t have the resources to watch a stock all day and buy at the perfect time, let alone strike while the iron is hot and sell for maximum profit.
“With trending careers and families, trying to time the market is a big question and why many investors would be better off letting professional fund managers do their job,” Rose says.
Instead of trying to guess when to buy and when to sell for optimal results, many experts suggest a different approach known as cost averaging in dollars.
“The cost average in dollars is the policy to invest at frequent intervals, such as a fixed amount for each paycheck for 20 years,” says Anthony Montenegro, creator of the 401 (k) Wealth Guide and founder of the Blackmont Group.
The main benefit of cost averaging in dollars is the fact that you take the emotion out of investing while paying less for stocks over time. This is because you buy less stocks when prices are high and more stocks when prices are low.
The good news is that most employees use this method when investing in their 401 (k) plans, Montenegro notes.
“They will be better off investing for a long time and earn more in compound returns than if they took short-term bets on the latest speculative fads,” he says.