Every new day, an army of self proclaimed “financial consultants” pitch the latest and greatest investment ideas to unwitting investors. In most cases, the genesis of these investment products is some method of timing, selection or forecasting. These factors (timing, selection and forecasting) are often portrayed as the” investing fountain of youth”.
For decades, investors have been wandering from strategy to strategy; stock to stock; product to product, in search of the perfect investment. We filmed a short video on this topic earlier this year that is apropos. The perfect investment…the investing fountain of youth is being able to be in the market when it is up and out when it is down; to be in the stocks that win and out of the ones that lose. Our advice to clients is to follow a different way, a strategy that focuses on what is historically probable, rather than remotely possible.
Don’t think, however, that deciding to follow the wrong path is just a benign diversion. No, chasing performance is costly, both in terms of the high transaction costs for the investments and the foregone opportunity costs for missing the returns freely provided by the market.
Research done by London University professor Stephen Wright and consultant Andrew Smithers on optimal investing strategies found that “investors with long term horizons should maintain a minimum of around 60% in stocks, even during equity bubbles”. Why? Well, stocks best all alternatives for long-term investors; trying to time the market has proven to be of little value; and finally, stocks can continue higher even when overvalued by historical norms.
Wall Street wants you to believe that they have “special information” on stocks and timing. They want to sell you this information disguised in shiny new investment products loaded up with heavy costs that make successful investing nearly impossible. They want you to buy the investing fountain of youth. Smart investors don’t fall for the sales pitch because the evidence tells us it is a failed approach. Ready for a real conversation?