You Don’t Need to Outsmart the Market to Be a Successful Investor
Many people believe the most successful investors are those who meticulously analyze trends, timing their buys and sells just right. There’s also a myth that if you’re not doing this, you’re destined for mediocre returns and will never see true success.
As a financial advisor with over two decades of experience, I can assure you that’s not true. You don’t have to outguess the market to see great results—in fact, trying to do so can often harm your portfolio. Here are three reasons why.
You Can’t Outsmart the Market
Outsmarting the market usually involves attempting to “buy low and sell high” by analyzing current market trends for inefficiencies or volatility indicators. This is a common strategy used by both portfolio managers and everyday investors alike. It may work sometimes, but it is far from perfect.
In fact, a new SPIVA report shows 68% of active fund managers underperformed their benchmarks in 2022. The long-term results of this report are even more significant: 84% of active fund managers underperform after 5 years and 95% underperform after 20 years.
Not only does outsmarting the market involve guessing when to buy in, but you then have to guess when to sell. That means for every gain, you have to be right twice to make timing the market worth it. Unfortunately, market moves can only truly be spotted in hindsight, and outsmarting the market is often closer to playing the lottery than it is to an educated guess.
You can be a successful investor simply by relying on time in the market instead of timing the market. The longer you stay invested in a particular asset, the more likely you are to experience growth over the long term. Considering the S&P 500 Index has averaged around 10% for the last 50 years, this strategy doesn’t seem all that bad. Buying and holding often results in much lower stress and a more secure investment experience for the average investor over the long term.
Riding the Wave Is Less Expensive
Trying to outsmart the market has been around just as long as the market itself, and though it rarely works, many people keep trying. Not only are you less likely to outperform the market through market timing, you could further reduce your returns depending on how often you trade. That’s because outsmarting the market can be expensive.
Depending on your account type, asset class, and where you are executing your trades, you will likely be charged for every purchase and sale you make, and that’s on top of any taxes owed on gains. The more frequently you trade, the higher your transaction costs will be.
If you held the assets for less than a year, your gain will be taxed as ordinary income at your marginal tax rate, which can be as high as 37%.
Even if you find an actively managed fund that is able to beat the market, they have to do so by a wide enough margin to cover its higher costs and more. As such, even some funds that beat the market end up with lower returns once fees are taken into account.
Staying Invested Produces Better Returns
Many investors will sell their positions during times of volatility in order to avoid or reduce a loss. But how do they know when to buy back in? This is one of the most difficult aspects of outsmarting the market, and it often leads to much less growth than staying invested the whole time would have produced.
For instance, a recent study by Schwab Center for Financial Research found bad market timing is worse than investing immediately, regardless of the market conditions at the time of investing. This indicates even in market downturns, or just before a downturn, investors who invest immediately and remain invested will be better off than those who stay on the sidelines or attempt to time the market.
The time value of money tells us a dollar today is worth more than a dollar tomorrow, and this is certainly the case when it comes to investing. The longer you are invested, the more likely you are to ride out the fluctuations of the day-to-day market and experience growth.
Is Your Investment Strategy Set Up for Success?
The market is unpredictable and full of surprises. Trying to pick the perfect investment strategy is like guessing the winning lottery numbers—nearly impossible. Instead of chasing a flawless formula, the key to success is focusing on the long game and ignoring the short-term noise.
At The Rosamond Financial Group, we help you build a financial plan aligned with your vision and values, creating an investment strategy designed to withstand market ups and downs. Reach out today for a complimentary consultation and see if we’re the right fit for your financial journey. You can call my office at 830-798-9400 or email solutions@rosamondfinancialgroup.com.
About Preston
Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with over two decades of industry experience. He provides comprehensive wealth management and financial services to successful business owners, corporate executives, and affluent retirees who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch, a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing solutions@rosamondfinancialgroup.com or schedule a call on his online calendar.