To sell or not to sell….
A recent report by JPMorgan stated that retail investors are throwing in the towel on their stocks and buying investments that short the market(betting against stocks). On the same day, non-retail investors such as hedge and mutual funds were buying stocks. Market events such as retail investor capitulation is typically a sign of a market bottom before a recovery because retail investors have a reoccurring bad habit of buying high and selling low. This seems like a good sign but proceed with caution. The Fed is still working on dampening inflation with raising interest rates and decreasing market liquidity. See my previous post for more information on what the Fed is doing to combat inflation. So why does this matter to you?
If you’re reading this then there is a high likelihood that you are a retail investor and have experienced the market turbulence. There is also a high likelihood of continued volatility for reasons mentioned above. So this is where you ask: Should I go to cash and wait it out? What this question is really asking is;
should I time the market?
I like to compare timing the market to playing dizzy bat. The market volatility makes you feel like your spinning quickly in place and when you can’t take anymore spinning you decide to stand up and take swing at a small ball being flung your direction. On rare occasions you can get a foul tip but most of the time it is a big whiff and you end up on the ground. After this you tend to feel a bit silly and decide it wasn’t a great idea.
How often do you think the professional investors of the world get timing the market correct? To be completely honest, if there was a person out there who could time the market with data rather than luck then I seriously doubt that person would share their strategy. If they told everyone then everyone would ride the markets correctly every time and there probably wouldn’t be a stock market anymore. Someone must lose for someone else to win. Not everyone can be winners. Morningstar, a well-known investment platform, does a report each year showing how many active funds beat their respective market index. In 2021 only 45% of the investments beat their index. This means 55% of investors in those strategies could have invested in the passive option, beat that fund AND saved money on the fees they had to pay that fund manager. This is not a new trend either and this explains why passive funds, such as ETFs, have become so popular and active funds have been experiencing large outflows.
So the pros can’t do it. What about individuals?
An independent research company named Dalbar, Inc. provides a study each year called the Quantitative Analysis of Investor Behavior report. This is a very well known and profound in the investment community. The compiled data showing the invest returns of the average investor versus the S&P 500 index from 1991 to 2020 and found that the index outperformed the average investor by 4.46% on an annualized basis. That is a huge difference and could mean that the investor could have potentially missed out on millions of dollars of return had they just staying invested in the index for 30 years.
There is a lot to unpack here though. The average investor would most likely run into a situation where they would need to draw on their account to cover life expenses which would greatly impact their ending balance. But outside of that circumstance you can see that the emotionless index greatly beats the human investor. In almost every situation checking your emotions at the door and not timing the market proves to be a lucrative strategy.
So what is the solution?
You simply need to work with a qualified professional who helps you from a psychological side of investing. Investing is not binary. Emotions and investor behavior is the largest reason retail investors will always trail their institutional counterparts. Like I mentioned earlier in this post, when retail was selling the institutions were buying. If you have a good advisor they will be telling you to dollar cost average into this market to buy stocks at discounted prices. Doing so without help is almost impossible due to the amount of information on the internet that could influence you to make a wrong decision. Confirmation bias is also a nasty trick we play on ourselves. This cognitive function forces your brain to only focus on information that agrees with your fear and makes you react to short-term market events rather than focusing on the long-term goal you assigned to your investments.
Investing during times like this is no easy task but you don’t need to do it alone. Working with an advisor can help you offload some of the stress and keep your mind on the goal rather than your balance. The markets are not rational and cannot be controlled so focus on what you can control. Your behavior and your human capital (ability to earn an income).
If you need a partner to help guide you, click this link to set up a time to talk. IF can help you stay on track and manage your stress. It’s what I love to do!
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