“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.” Peter Lynch (American investor, mutual fund manager, and philanthropist)
I’ve written before about the dangers and insanity of the black hole of economic forecasting. Quoting myself:
“The economy is entirely uncorrelated with the stock market over any but the very longest time horizons. Yet, many investors get caught up in the economic news du jour as they seek to make educated investment decisions. These are, at their heart, mutually exclusive. The economy can be on firm footing with retail sales shooting to the moon and unemployment low. That doesn’t stop the market from swooning due to imprudent management decisions or lackluster sales. Conversely, the economy can be in the depths of despair, ravaged by whatever metric you’d like to choose…all the while the markets cheering companies’ robust earnings and sales forecasts.”
I reckon I’d like to add 2 additional black holes to my list. First, market timing. The travesty of this heretical holy grail is that, in reality, markets can never be consistently timed…and the very attempt to do so diminishes investor return. The more often Joe and Sally goes in and out of markets, searching for a wholly illusory timing advantage, the lower will be Joe and Sally’s lifetime return. Indeed, they will not just underperform the market, but their own investments. Market timing is a fool’s game and a fanciful wish.
Dare I add another investment black hole? “Yes, please!” I hear from the audience. Here it is: performance chasing. This, quite honestly, is worse than the former and by far worse than the first. The theorem here is that what has gone up will continue to. And the definition of FOMO is that you’d better hitch your train to that up-ness before its too late. Conversely, that which is going down will continue its down-ness, forcing the investor to sell at the low before the investment quite surely will go to zero (which it rarely does). Quite simply there is no statistical evidence for the persistence of performance…in either direction. Immediate past performance (1yr, 3yr, 10yr, 1 week, 1 day) has no connection whatsoever to that of the next block of time, respectively.
To grind the point home on this particular black hole of performance chasing, there is no connection either between the investment return and Joe and Sally’s (investor) return. I’m going to age myself, but I recall the best-performing stock mutual fund that kicked off the first decade of the new millennia from 2000-2009 returned a stellar 18.2% annualized return. However, the most shocking part of this story is that this fund’s average investor return (that is, the fund’s ever-important dollar-weighted return) was a negative eleven percent. Lest you need to see that in numerical form, that’s -11%, with a minus sign in front. This is due to investors selling out of and buying into the fund, in and out, in and out, several times over and over throughout the duration of that timeframe. 18.2% vs. -11%.
Lesson: Don’t fall prey to investment black holes and fanciful wishes. Stay calm. Stay invested. The crisis du-jour will pass. Your wealth will compound. Your goals are within reach. Let a skilled Financial Advisor assist you along your journey. You’ll be glad you did!