This will be a two part posting on what you can and what you cannot control when it comes to investing. This first part will highlight four things you cannot control. The second part, what you can control will be posted tomorrow. Be sure to also read up on What to Look For in Mutual Funds to learn specifically about mutual funds.
Investing: What You Can’t Control
- Picking winning stocks
- Picking superior managers
- Timing markets
- Financial press
Picking Winning Stocks
Everyone gets lucky when it comes to investing. You pick a stock that doubles in price. Congratulations. Unfortunately, sooner or later, you are going to pick a loser. It’s inevitable. You cannot consistently pick winners all the time. No one can. Not even fund managers.
Studies have show that fund managers that beat the market one year are less likely to repeat that feat the following year. If they do accomplish it, the odds are even lower the following year and so on.
Since no one consistently beats the market, you are better off picking a passive mutual fund that tracks the market. Don’t chase returns. Invest for the long-term.
Picking Superior Managers
This ties into the point above. You can’t pick winners all the time. Sadly, neither can the professionals. Some have had great runs, but eventually the run ends and they lose. Don’t get caught up in the managers past record. He cannot predict the future and pick the winners. This is why over 80% of actively managed funds don’t beat the market.
The best example of this is with Bill Miller of Legg Mason. From 1991 through 2005 his fund beat the market. Mr. Miller said “As for the so-called streak, that’s an accident of the calendar. If the year ended on different months it wouldn’t be there and at some point the mathematics will hit us. We’ve been lucky.”
It was determined that the odds of beating the market each year during this period was 1 in 2.3 million. And you think you can pick a mutual fund that will consistently beat the market? You can’t.
Mr. Miller’s fund ended up performing worse than the market for 2006-2008 until beating it again in 2009.
Again, you are better off investing in a passive fund tracking the market.
No one knows when the market will rise or fall. No one. Look at the past summer as an example. Huge loses one day, then huge gains the next. You just don’t know. It seemed as though we were out of the woods after a few days of less volatile trading, but then the market dropped another 400 points.
Because of this, there is no point in trying to jump in and out. Jumping around hurts your returns. You need to ride it out. Think of the market like a thunderstorm. It’s bad out there, but you ride it out knowing the storm will pass and the sun will come back out. The stock market is the same way. The sun always comes back out in the long run. You just have to ride out the short term. Do your best to tune out the short term hype or doom and gloom.
This ties into timing the markets. If you listen to the news or read the headlines, you would think the world is coming to an end. I think the newspapers and magazines have stock photographs of traders showing anguish on their faces. Do your best to ignore the media. They make money preaching doom or exuberance. They work your emotions.
Think about it: Wall Street makes it’s money on trading fees and commissions. The more you trade, the more money they make. Therefore, it is in their best interest to get you to trade. How do they get you to trade? They scare you or they excite you. Once they get you emotionally hooked, they have you.
If you can tune out these stories and stay focused and committed to your long term goals – staying invested – you will come out OK in the end.
These are the main things you cannot control when it comes to investing. You can’t pick winning stocks, fund managers can’t pick winning stocks, you can’t time the market and the media wants you to trade all of the time. By realizing these things, you are 80% of the way to being a successful investor.