As New York City slowly dries out from Hurricane Sandy and moves towards normalcy, and as the too-close-to-call presidential election reaches its climax, you might find it difficult to find the intellectual capacity for fundamental analysis or big-picture market trends right now.
That’s a good thing. Because the best investment move you can make week isn’t to worry about what you’re missing. The best thing you can do is nothing.
The fear of missing something this earnings season is logical, considering we are in the midst of an admittedly high-stakes quarterly reporting rush that will mark the first contraction in corporate profits since the Great Recession. And the worries over political implications in the wake of Election Day are equally understandable.
But in the long run, it is best not to overthink things.
A small number of shrewd swing traders can indeed beat the market, but many fall short. Keep in mind that a stunning 84% of active managers underperformed the market in 2011. To significantly outperform the major indices is no simple feat, so be very sure you know what you’re up against before you start moving money around like mad.
And even if you manage to frantically trade your way to a small outperformance after all the trading fees and short-term capital gains, don’t you care about your time or your stress levels? You could have been enjoying the grandkids instead of day trading.
Yes, once-in-a-generation events like the financial crisis are certainly exceptions to doing nothing. But keep in mind that it only took about a year for 401k levels to bounce back from the 2008-09 crash (thanks in part to the intervening contributions, of course … but it’s a figure worth noting).
And as of this writing, the S&P is neck-and-neck with its 2008 peak, less than 10% away from its record high set in 2007. Many blue chips — from Apple (NASDAQ:AAPL) and Home Depot (NYSE:HD) to Amazon (NASDAQ:AMZN) to Visa (NYSE:V) — have more than doubled. Others — like Consolidated Edison (NYSE:ED), McDonald’s (NYSE:MCD) and Abbott Labs (NYSE:ABT) have 50%-plus returns during the last five years when you bake in the big dividends.
What’s wrong with picking a handful of excellent investments, kicking back for a few years as they throw off nice dividends, then cashing out for tax efficient gains? You save on trading fees, you save on stress and you can significantly beat the market and provide for a comfortable retirement.
See also: 25 Most Dangerous Funds to Own Now
So here are some things to keep in mind this week — and every week — as the crush of information seems just too much to bear:
- Remember that Warren Buffett famously said: “I buy on the assumption that they could close the market the next day and not reopen it for five years.”
- Remember that Vanguard founder John Bogle said: “Stocks should do about twice as well as bonds over the coming decade. But what good is that going to do you if, when stocks drop 50% as they are likely to do at some point, you say: I’m out of here?”
- Remember that Barry Ritholtz warns that one of the biggest investor mistakes is emotional trading, driven “by the buying of stocks at the highest valuations as excitement builds near the top of the cycle, and by panicked selling near the lows.”
You might scoff as this notion of passive investing, since it’s predicated on the idea of tracking the market when oftentimes, going to cash and avoiding a downturn can mean significant outperformance — even if there are no “profits” to be had.
Fair point. But keep in mind this report from Savant Capital Management that shows the severe damage you do to your portfolio if you get out right before a rally or you’re too late getting back in. The bottom line is that the lion’s share of the market’s gains often are generated in a small period of time — so you better be damn sure of your market-timing strategy if you want to go this route.
And one final note: The mess of superstorm Sandy should prove yet again that there are things in life much more important than staying plugged into your computer and looking to make the next big trade. Ask yourself how much you really need to retire comfortably. And ask yourself whether it’s worth forfeiting time with family in friends simply for the chance — not the guarantee — of racking up massive stock market returns.
The holidays are just around the corner, friend. Stick to your core strategy and check in on your holdings, but don’t panic and do something you will regret.
Your blood pressure and your family life — not to mention your retirement account — ultimately will be the better for it.
- Ritholtz’s rules of investing, Part 1 and Part 2. There’s good advice on passive strategies and avoiding emotional trading, as well as other shrewd tips. (The Big Picture)
- Why investors are their own worst enemy. (Moneywatch)
- How loss aversion and narrow framing result in investor error. (Regent Atlantic Capital)
- A great vintage (well, circa 2000) article on how “Trading is Hazardous to Your Wealth” — true then, true now, based on lots of data. (The Journal of Finance)
- More research, more recently, about investors and their self-destructive behavior. (Forbes)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.