Over the past 2 weeks we have posted the following videos to social media, The Difficulty of Timing the Market and Impulsive Portfolio Moves is Like Changing Lanes in Traffic. We have also posted a video from Gregory Prato, the President, and CEO of Prato Capital Management, to our website discussing the impact of emotional reactions to an investor’s portfolio, How can reacting emotionally affect performance?
These videos speak to the same subject – trying to guess where a stock or the stock market will be in the future and trying to make large gains or minimize losses by doing so. Investors think they can beat the overall market by changing their portfolios due to perceived insights of the economy or market direction. It happens when the stock market is rising or falling.
Timing a stock or the stock market overall requires 2 correct decisions, when to buy and when to sell. The first decision to buy or sell may be easy, but the second decision is very difficult as emotions sometimes cloud our decisions. The highs and lows of a stock or the overall stock market are only seen in hindsight and the emotional decisions required of market timing often have a negative impact on overall portfolio returns.
The chart below shows the impact of missing days of strong returns in the S&P 500. The impact is real and significant. We don’t know when these days will occur, but these days often happen after some kind of market decline and often when many investors have pulled money from equities.
Other reasons to not let your emotions drive your portfolio decisions:
- Added costs – Added trading costs and tax implications with capital gains, both short and longterm.
- Added risk – Risk increases greatly when compared to a stable diversified portfolio.
- Added stress – Decisions of when to buy at the bottom and sell at the top of the market adds stress to the investor.
- No added gains – Research has consistently shown that few investment professionals can consistently beat the overall market over the long-term. If the professionals can’t consistently outperform the overall market, the individual investor probably does not have any added insight or edge that will outperform.
There is an alternative to guessing which direction a stock or the overall stock market is heading: A diversified and highly personalized exposure to equities and fixed income (and this is crucial) based on your risk tolerance and your personal Financial Life Plan.
Then using history as a guide (and without emotion or media noise) relying on our processes to “tune out” the media noise and rebalance your portfolio to maintain your personalized exposure to all markets. This is what we here at Prato Capital do with discipline. And we are proud of it.
Please call us for more information on a better way to approach investing and how we can help you with your Financial Life Plan.