There’s a common belief that the most successful investors are those who meticulously analyze trends to find the ideal moments to buy and sell. Another common idea is that if you’re not taking this approach, you can only hope for average investment outcomes and never reach true financial success.
As a professional financial advisor with over 20 years in the industry, I’m here to say that’s not true. You don’t need to outsmart the market to be a successful investor—sometimes trying to do so can even harm your portfolio. Here are three reasons why and what you can do instead.
You Can’t Outsmart the Market
Outsmarting the market usually involves attempting to “buy low and sell high” by analyzing current market trends for inefficiencies or volatility indicators. This is a common strategy used by both portfolio managers and everyday investors alike. It may work sometimes, but it is far from perfect.
In fact, a new SPIVA report shows that 68% of active fund managers underperformed their benchmarks in 2022. The long-term results of this report are even more significant: 84% of active fund managers underperform after 5 years and 95% underperform after 20 years.
Not only does outsmarting the market involve guessing when to buy in, but you then have to guess when to sell. That means for every gain, you have to be right twice to make timing the market worth it. Unfortunately, market moves can only truly be spotted in hindsight, and outsmarting the market is often closer to playing the lottery than it is to an educated guess.
You can be a successful investor simply by relying on time in the market instead of timing the market. The longer you stay invested in a particular asset, the more likely you are to experience growth over the long term. Considering the S&P 500 Index has averaged around 9.4% for the last 50 years, this strategy doesn’t seem all that bad. Buying and holding often results in much lower stress and a more secure investment experience for the average investor over the long term.
Investors cannot directly invest in indices. Past performance does not guarantee future results.
Riding the Wave Is Less Expensive
Trying to outsmart the market has been around just as long as the market itself, and though it rarely works, many people keep trying. Not only are you less likely to outperform the market through market timing, you could further reduce your returns depending on how often you trade. That’s because outsmarting the market can be expensive.
Depending on your account type, asset class, and where you are executing your trades, you will likely be charged for every purchase and sale you make, and that’s on top of any taxes owed on gains. The more frequently you trade, the higher your transaction costs will be.
If you held the assets for less than a year, your gain will be taxed as ordinary income at your marginal tax rate, which can be as high as 37%.
Even if you find an actively managed fund that is able to beat the market, they have to do so by a wide enough margin to cover its higher costs and more. As such, even some funds that beat the market end up with lower returns once fees are taken into account.
Staying Invested May Produce Better Returns
Many investors will sell their positions during times of volatility in order to avoid or reduce a loss. But how do they know when to buy back in? This is one of the most difficult aspects of outsmarting the market, and it often leads to much less growth than staying invested the whole time would have produced.
For instance, a recent study by Schwab Center for Financial Research found that bad market timing is worse than investing immediately, regardless of the market conditions at the time of investing. This indicates that even in market downturns, or just before a downturn, investors who invest immediately and remain invested will be better off than those who stay on the sidelines or attempt to time the market.
The time value of money tells us that a dollar today is worth more than a dollar tomorrow, and this is certainly the case when it comes to investing. The longer you are invested, the more likely you are to ride out the fluctuations of the day-to-day market and experience growth.
Investments in securities do not offer a fix rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results.
Is Your Investment Strategy Set Up for Success?
The market is hard to predict and often catches everyone off guard. Trying to pick a perfect stock market strategy that never fails is like trying to guess the winning lottery numbers—it’s highly unlikely, if not impossible. A truly successful investment strategy is one that ignores the short-term noise and keeps its eyes on the long-term prize.
At Premier Planning Group, we’re here to help you find, create, and enjoy the life you desire by aligning your finances with your dreams and values. We’ll guide you toward becoming a successful investor by crafting a robust long-term investment strategy designed to weather the ups and downs of the market. Call our office at (443) 837-2520 or email my executive assistant, Talia Grover, at taliagrover@premierplanninggroup.com to set up a complimentary consultation.
About Brion
Brion Harris is the CEO, founder, and managing partner of Premier Planning Group, an independent financial firm specializing in working with pre-retirees and retirees, helping them create customized wealth preservation and retirement distribution strategies. With over 20 years of experience, Brion has developed deep knowledge and skill in helping his clients simplify their finances and find confidence in their financial future. Brion and the Premier Planning team are known for their unparalleled client service and their dedication building long-lasting relationships with their clients. As a result, Brion has been the recipient of the #1 Advisor Leadership Award* at Summit Brokerage Services for eight years running and has a reputation as one of the top retirement advisors in the business.
Brion is a proud 20-year resident of the Annapolis community, where he resides with his wife, Elizabeth, their three children, Addison, Jay, and Scarlett, and their two dogs, Pepper and Coco. When he’s not working, you can find him boating, skiing, traveling, and enjoying good food and music with his family. If you want to learn more about Brion, connect with him on LinkedIn.
*The #1 Advisor and Leadership Award is based on production data while at Summit Brokerage Services, Inc. Brion Harris received the award in 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2021. This award is not a guarantee of future investment success. This recognition should not be construed as an endorsement of the advisor by any client.