Donald Trump’s huge election win set off one of the most astonishing reversals in stock-market history, leaving shellshocked investors to ponder how best to navigate such wicked volatility.
In that respect, now is a great time to ask yourself this question. But don’t just haphazardly tick one of the boxes. Think. Focus.
Really chew on it, because your returns just may depend on it:
Would you rather: Buy low, sell high? Or buy high, sell low?
Simple to answer, incredibly difficult for the market-timing retail investor to achieve. The concept is the central part of a timely urban legend that personal finance author Preet Banerjee recently recounted on the Tangerine website.
As the story goes, an investment adviser would ask new clients to fill out a form asking that very question. And, obviously, everybody answered, “buy low, sell high.” Later, when their investment portfolios would inevitably suffer a short-term loss, they’d do what the typical retail investors often does: Get scared and demand to sell. The adviser would agree to do so, but only if the client would re-send the initial form with the “buy high, sell low” box ticked.
“If I were to go back to being an investment adviser, I would absolutely implement this silly little gimmick for all new clients,” Banerjee wrote. “My experience has been that investors rely on short-term emotion more often than not, which leads to underperformance for investor portfolios.”
“Think of your portfolio like a bar of soap. The more you touch it, the smaller it gets.”
Presumably, there were loads of investors frantically ringing their advisers on Tuesday night when Trump panic rocked global markets, with Dow futures YMZ6, +0.04% plunging nearly 800 points. Anybody who hastily unwound their equity positions got a quick and painful lesson on getting caught up in short-term fluctuations as stocks charged higher DJIA, +1.17%
Amid the scramble for answers in the aftermath, one investor brought the story to Reddit’s personal finance group, home to 8.7 million subscribers, calling it “a little experiment you might try for yourself if you’re thinking you want to get out of the market to prevent more losses.”
In the heat of the volatility, the idea of keeping your eye on the long-term prize was heartily embraced with responses like this “Preach it yo. This dip isn’t even as low as what happened back in February this year,” and “It’s going to be choppy and then it will sort itself out. Maybe up, maybe down. But for every person who succeeds at guessing the direction there are 1,000 who don’t.”
That last comment is the whole the point Banerjee was trying to make with his post. He cited a recent study that shows annualized returns over the past two decades comes in at 4.7% for the average investor, compared with more than 8% for the S&P 500 SPX, +0.20% benchmark.
“There’s a funny old saying in the investing world that can help you remember the best strategy to follow once you’ve picked a prudent portfolio tailored to your personality and goals,” he said. “Think of your portfolio like a bar of soap. The more you touch it, the smaller it gets.”
Investing is like a bar of soap…