Do The Opposite

I sold my share portfolio last week. It’s just too risky – you know, Trump, China, interest rates, there’s just too much risk in the market at the moment. The whole lot I replied? Yep, the whole lot. I’ll get back in when it’s less risky.

This was the latest portfolio positioning for a (I think mid 40’s) gentlemen I met over the weekend through a mutual friend. What do you think he asks, you’re in finance, right?

I get this question all the time. As soon as people find out what I do – Where should I investment my money? Is the market going to crash? What do you think of the property market? I love discussing markets, so I’m happy to roll with the conversation. Financial history fascinates me, so too does the ongoing propensity of poor decision making by individuals.

People always want something to talk about. Whether it’s crypto-currency or trade-war, choose the rabbit hole you want to go down – you’re not short of them. As advisers, and in fact as investors, we need to be able to separate the conversation that is going on at kid’s birthday parties and bbqs, with what people are actually doing with their money.

The noise

People have been investing money for centuries. They’ve been doing so through good news and bad. This is one of my favourite charts. It plots the US stock market’s tumultuous history from 1896 to 2016 and highlights major events during this time – from the sinking of the Titanic to Brexit and everything in between. Notwithstanding the 121 major events, the chart proves once again that over the long-term, the stock market has risen as the drive for innovation and productivity trumps fear (click for larger image).

Source: Chris Kacher – MoKa Investors

It’s not the poor decision making by individuals that puzzles me, it’s seeing the evidence and proof that what you’re doing just doesn’t work, yet still doing it anyway is what puzzles me. It’s insanity as Albert Einstein once succinctly defined:

“The definition of insanity is doing the same thing over and over again, but expecting different results”

The average investor

There’s never one portfolio solution that will meet every investor’s objective. Whether you’re in your 70’s, seeking a regular and stable income, or whether you’re 45 trying to grow your asset base for your future, the two portfolio’s are going to look very different. The one thing that these two investors have in common however, is that (typically) they look for activity and complexity.

Staying the course, staying diversified, keeping your costs low is far too boring for these folk. And because it’s boring, they seek complexity and activity. Yet, the evidence suggests that because they’re doing the opposite of what they should, they lose money. And when I say they lose money, I mean they leave money on the table. They don’t generate the returns they should have generated should they have stayed the course. It’s as if you don’t even realise what you’re doing because you’re still generating some rate of return, albeit lower than what you should (but you never knew that).

Source: JP Morgan

Our industry thrives on these types of investors. And investors love hearing from the mouth piece that has a great story to tell. It’s a match made in heaven. For the most part of our industry (and I’m ashamed to say it), their job is to keep you as their investor/client, amused and entertained. It’s nothing more than dinner theater.

In the pursuit of trying to beat the market, the average investor falls short – by a huge margin.

You have to understand one important thing, about the market and that is for every buyer, there is a seller. And every seller, there is a buyer. So when transactions take place, the only winner, net, is the man in the middle. The croupier in the gambling casino.

– Jack Bogle

The perils of market timing

He sold his share portfolio because the market was too risky, and he’ll get back in when the market is less risky. He may get the first part of this call right, but he then needs to get the second part right too – when does he get back in?

The best investors in the world can’t get this right. They can’t pick the winning stocks, they can’t pick the manager who picks the stocks to beat the market. What makes you think you can?

I recently shared this chart, and I think it’s timely to share again. Harvard University’s endowment has trailed the S&P 500 index for the last 1, 3, 5, and 10 years. This is the largest university endowment fund in the US with some of the smartest people too, you’d think the fund’s investment returns would be out of this world. Yet even the biggest and the best can’t beat the market over the short, medium, & long-term.

Source: Bloomberg

It’s crazy but true.

If you’ve ever attempted to time the market, you don’t need me to tell you how difficult, stressful, and time consuming it is. To efficiently time the market, you need to be right twice – selling at the top, and getting back in at the bottom. Rarely anyone can predict either – it’s almost impossible as skill, more possible with luck. You may not have “lost” money, but allow me to show you what you left on the table.

Historical data clearly shows that staying invested and following a consistent strategy produces larger returns over time than letting current events or market valuations drive your investment approach.

Here’s the performance of $10,000 invested between 1 January 1997, and 30 December 2016. The chart shows the return of an investor who stayed the course (7.68% pa), the investor who missed the 10 best days in the market (4% pa), 20 best days (1.57% pa), and so on, you get the picture. Missing the 10, 20, 30 best days over a 20 year period makes all the difference in the end – the margin for error is so small!

Source: JP Morgan

In summary

I know how difficult it can be. It’ tempting – the excitement, the thrill, the belief that you’re smarter or different to the millions of other investors trading on the same day. Yet the evidence is clear. Unless, your Warren Buffett or Jim Simons, don’t risk your family’s future by gambling away your wealth.

Next time your find yourself itching to do what you normally do, pause for a moment and maybe do what George Costanza once did – do the opposite.