My New Year’s resolution for 2013 is to kick my biggest vice. No, I don’t smoke. And yes, I drink — but a glass of bourbon every evening is the least of my problems.
I’m talking about my biggest investing vice — one that you may share.
I trade too much.
It’s a common problem. Self-directed investors by their very nature think they can manage their money better than someone else — and certainly better than an index like the Dow Jones or S&P 500. We think we’re smart; we think we understand Wall Street. That’s why we trade.
But we often trade too much, getting out of good positions too soon or getting into bad positions too early.
Blame it on our lack of access to high-priced tools and analysis, blame it on investor psychology, blame it on media outlets like this one that overload you with commentary. But whatever the cause, most retail investors are their own worst enemy.
So I plan to kick the trading habit in 2013. And here’s why:
- Buy-and-hold works: As The Wall Street Journal’s Jason Zweig points out, “The classic ‘balanced’ portfolio favored by prudent investors — 60% in stocks, 40% in bonds — is up 11.2% over the past 12 months and 10.4% annually for the past three years.” Clearly you can make good money with this kind of strategy, so why get greedy?
- Active managers chronically underperform: It should be common knowledge that most active managers can’t beat their benchmark. A stunning 84% of active managers underperformed the market in 2011. This year is looking similarly disappointing, as clients pull money out of hedge funds at the highest pace in three years after continued underperformance. So why not just buy the benchmark instead?
- Market timing is tricky business: This year was “a graveyard for tacticians” in the words of uber-blogger Josh Brown at The Reformed Broker. There was a front-loaded run of about 13% in the S&P 500 through early April, a 10% plunge from that peak to early June, and then a 13% rally again from June to about October. If you saw all three of those legs coming, then you should open a psychic phone service.
- Correlation is high: Anyone who checks the StockTwits Heatmap or looks at advancers vs. decliners regularly is used to seeing most of the market moving in the same direction, regardless of industry or market cap. But this correlation is also increasingly true for gold. So if everything moves mostly in the same direction and at almost the same magnitude, why keep swapping out stocks?
- Passive indexing is in fashion for a reason: According to Businessweek, Vanguard is having its best year ever, shattering records with a staggering $130 billion in deposits to its low-cost, index-based fund model. Sure, ill-advised ETFs using leverage or chasing yield — or even doing both — continue to roll out. But most investors have gotten tired of paying for products that don’t work. Why go for a fad?
This is not to say I will stop managing my own money, or picking stocks I think will outperform. I love the markets and researching stocks, and I have made enough good decisions to think I can do this. I’ve made a lot of bad ones, to be sure, but like the occasional birdie in my rather pedestrian golf game, it’s those rare moments of greatness that keep me coming back and fool me into thinking I’m good at this.
Still, in 2013 I will try to do a better job of letting my bedrock portfolio of passive funds do their job. I will also remember that human nature is to buy high after a big run and sell low when the panic of a crash is at its worst.
For instance: In July I tried to catch a falling knife in a coal stock but panicked and sold out for a double-digit loss in less than two weeks. The stock quickly rebounded a month later and remains up about 20%.
I shouldn’t have traded so much.
It won’t be easy, but in 2013 I’m going do my best to stop enriching my broker with trading fees and start focusing on the power of compound interest and the importance of trading less.
Maybe giving up my nightly bourbon would be easier. But this resolution to stop trading so much seems like a change that’s worth making in the New Year.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.