The Greatest Mistake Investors Make

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Includes: SPY
by: Michael A. Gayed, CFA

Summary

Many stock averages worldwide got into oversold territory quickly.

Studies have shown that the more frequent an investor checks their account balances, the more over time they dramatically underperform nearly every single part of the investable landscape.

With the end of QE near, it stands to reason historical cause and effect will reassert itself in terms of the inputs that our risk trigger focuses on.

"You make mistakes. Mistakes don't make you." - Maxwell Maltz

The S&P 500 (NYSEARCA:SPY) and Russell 2000 (NYSEARCA:IWM) rose last week after a volatile ride while at the same time emerging markets closed marginally lower. Many stock averages worldwide got into oversold territory quickly, as money rushed out of Junk Debt ETFs (NYSEARCA:JNK) and many popular equity funds suffered sudden redemptions. Indeed market internals have been sending a negative message, but rarely do markets go straight down. Ultimately, what matters is not direction, but the pattern under which the direction unfolds.

This leads me to one of the biggest mistakes I find investors tend to exhibit. In today's age, it is extremely easy to read a headline, look at some charts, and come up with a conclusion about what happens next to stocks, bonds, commodities, etc. Frequent checking of account balances and performance results in more dopamine and cortisol pulsing through the brain than perhaps ever before in history, as gains and losses become visible. What is missed by those that actively and frequently check their portfolios is the fact that doing so is factually detrimental to long-term wealth creation.

This is not open to debate - studies have shown that the more frequent an investor checks their account balances, the more over time they dramatically underperform nearly every single part of the investable landscape. The reason? The more frequently one checks his or her portfolio, the more noise that individual will see in returns. That noise results in panic buying or selling when the reality is that much of day to day movement in markets is random. Those who check their account balances less frequently have been proven to generate better performance than those who check often because they don't see volatility noise which ultimately causes poor decisions.

To that end, last week served as a reminder of that. Many may have been on the edge of pressing the sell button on equities Thursday, only to ultimately miss the comeback on Friday. As to our mutual funds and separate accounts, there were no changes. Intermarket movement in the very short-term supports equities in the coming week as opposed to Treasuries or defensive sectors. It is becoming increasingly clear conditions are changing and that we are entering an environment which is different from pre-July 2014. That is very positive for us, given that in an environment like the one we just saw, buy and rotate strategies universally could not gain traction as evidenced by hedge fund performance and tactical managers.

With the end of QE near, it stands to reason historical cause and effect will reassert itself in terms of the inputs that our risk trigger focuses on. For those that believe they should chase past performers, I encourage you to consider that investing in any strategy is about buying low and selling high, and not trading yesterday.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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