Posted on October 29, 2018
Plain Sight Strategy #1: Being There
White space is the essential empty areas in between that hidden in plain sight. We barely notice them … until they’re not there:
When making investment decisions, most people likewise assume that the most eye-catching ink matters the most: an alarming economic forecast, an exciting Initial Public Offering, a hot trading tips. But there’s a catch; this commonplace assumption does not hold up under evidence-based scrutiny. In reality, you have little or no control over how the most obvious news impacts your investments. The most exciting action has already been priced into any trade you might make well before you decide to make it.
Instead of fixating on the headline news, consider that liberating financial white space. There, hidden in plain sight, you’ll find a number of powerful investment strategies that are freely available and far more within our control. In this series, we’ll introduce three of our favorite “plain sight” investment strategies:
- Being there
- Managing for market risks
- Controlling costs
We emphasize these – and we think that you should too – because (1) they’re simple enough to apply once you know they’re there, (2) they can have a significant impact on your investment experience, and (3) we see too many investors ignoring them at their peril.
Plain-Sight Strategy #1: Being There
To receive a return on your investment, first you must invest (and stay invested).
Bottom line, you cannot expect your stash of cash to grow when it is lying fallow. It’s hard to imagine a more basic principle than that, so why do so few investors manage to embrace it? The answer is found in a sentiment you may have heard before: Investing is simple, but, it’s not easy.
It’s relatively simple to accept the notion of no pain, no gain. To earn returns, you must put your assets at risk in ventures that are expected to compensate you for your faith that they will succeed … if they do. Then you must patiently await the desired success, knowing that it is expected but not guaranteed. The riskier the ventures, the less certain the outcomes, but the more you can expect to earn for enduring the uncertainty … if you do.
Instead, many investors panic when market risk arises and move their money to the proverbial sidelines. They also fret that they’re going to miss the boat when the market surges, so they pile into whatever is the latest success story. To cite just one of many analyses of these tendencies, a 2014 Federal Reserve economic synopsis looked at performance from 1984–2012 and found annual damage of up to 5 percent attributable to return-chasing behavior. The report concluded: “[P]oor investment timing caused by return-chasing behavior has a significant impact on portfolio performance.”1
By chasing and fleeing hot and cold markets, you’re undesirably buying high and selling low. You’re also disregarding decades of empirical evidence that informs us that one of the best ways to capture long-term market growth is to build a solid, individualized plan, and to then stick to your plan by riding out the market’s near-term ebbs and flows.
With this simple strategy, you’re trusting that the market will continue to do what it has done for many decades when viewed from a long-term perspective: It has grown.
To echo our earlier mentioned sentiment, it’s simple to understand how the market’s gains and pains are so closely related. But it’s never easy to endure the pain when it occurs – whether that’s in the form of plummeting markets or tempting trends. Like a first-time skydiver, you cannot know how you’re going to feel and what you’re going to do about a free-fall until you’re in it. Behavioral finance informs us that, thanks to our most basic instincts, we’re subjected to a host of financially damaging biases 3 – loss aversion, recency (focusing largely on recent events/performance with little regard to more distant events/performance), herd mentality and many others – that lead us astray during these sorts of “fight or flight” market conditions.
This is why you want to prepare for your investment leaps well in advance, preferably with an evidence-based adviser at your side to help you maintain your resolve.
In our next piece, we’ll introduce our plain-sight strategy for managing challenging market risks and temptations, so you can be better equipped in your quest for long-term investment success.
Shore Point Advisors is registered as an investment adviser with the State of New Jersey. Shore Point Advisors only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Past performance is not indicative of future results. All investment strategies have the potential for profit or loss. There are no assurances that an investor’s portfolio will match or outperform any particular benchmark. This content was prepared by a third-party provider. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. All expressions of opinion reflect the judgment of the authors on the date of publication and are subject to change.
1 Chien, YiLi. “The Cost of Chasing Returns. Economic Synopsis, 2014 Number 18” Federal Reserve Bank of St. Louis, 18 Jul. 2014, files.stlouisfed.org/files/htdocs/publications/es/14/ES_18_2014-07-18.pdf.
2 Clements, Jonathan. “Are Index-Fund Investors Smarter?” MarketWatch, 30 Mar. 2015, www.marketwatch.com/story/are-index-fund-investors-smarter-2015-03-30.
3 Stalter, Kate. “7 Behavioral Biases That May Hurt Your Investments.” U.S. News & World Report, U.S. News & World Report, 26 May 2015, 2:09pm, money.usnews.com/money/personal-finance/mutual-funds/articles/2015/05/26/7-behavioral-biases-that-may-hurt-your-investments.