"I've Never Made Money in the Stock Market"

"I've never made money in the stock market" is something I hear quite often, and the unfortunate reality is that for most people, it's probably true. Not because the stock market didn't provide the return, but because the investor wasn't there to capture it.

As investors, we're contently being bombarded with the latest and greatest get-rich-quick scheme. Be it a turn-a-round company that your brother-in-law says is a sure thing, or the stock jockey that interrupted your dinner to tell you about the newest IPO that you don't want to miss out on, everyone is looking for the silver bullet of investments, hoping to strike it rich.  

The reality is that very few people get rich quickly, and when they do, they've either taken significant risk to do so, or just got plain lucky. 

If you have the luxury of being able to take a lot of risk and "gamble" a small portion of your money away on a speculative investment, then be my guest, but for most investors, they need to maximize return with the least amount of risk possible. The best tool that I know to accomplish that is a beautifully diversified portfolio of stocks and bonds. 

Here's where you say, "Marc, I've never made money in the stock market", to which I say, "but the market in which you invest in has made money, and a lot of it!". So why the difference between what most investors experience and the investments which they own. Here's the skinny: DALBAR an independent research group has been quantifying investor behavior on Investment success since 1994. What DALBAR has found consistently over that time is this: 

"Investment results are more dependent on investor behavior that on fund performance. Mutual find investors who hold on to their investments have been more successful than those who try to time the market." 

In the 2014, DALBAR found that over the 20 year period ending December 2013, the average stock fund investor received a mere 5.02% annual rate of return while the benchmark for those stock funds (S&P 500) returned a 9.22% return over that same time period. We see a consistent story over the 10, 5, 3, and 1 yr periods. The research goes on to show that the disparity between investor return and their investments is primarily contributed to BAD INVESTMENT BEHAVIOR, in other words, trying to time the market.

Instead of trying to time the market there are a few things that if we as investors can do correctly and consistently, we will grow our wealth...it's inevitable. Here they are:

1. Build a diversified portfolio of stocks and bonds. The percentage of stocks vs. bonds within your portfolio is called your "asset allocation". Your allocation will be dependent upon things like your age, when you will need the money, and how disciplined you can be when, NOT IF, your portfolio temporarily goes down in value. Our definition of diversification is owning thousands of stocks in about 45 countries. Ask Jim Cramer what diversification is and you'll get something quite different. Jim say between 5 and 10 stocks. Remember, Jim Cramer and the many of other talking heads on TV are not interested in whether or not you meet your long-term financial goals. They're really not. They're entertaining and fun to listen to but all they care about is that you turn the TV or radio back on tomorrow.

2. Re-balancing on the inevitable highs and lows. It should come to no surprise that the market will temporarily retreat from this amazing run we've experienced in the past 5 years or so. That's what the market does....it goes up a lot and then down a little (sometimes more than others) and then up a lot and down a little...over and over again. Over the long-run it has only continued to go up. So that we don't make irrational decisions, we should avoid reacting to those inevitable fluctuations. Instead, we should buy and sell based upon a pre-set portfolio mix (allocation) that we're comfortable with and is designed to meet our long-term goals. For example, if after talking with your financial advisor, you determine together that a 50% stock and 50% bond portfolio mix be most likely to achieve your financial goals, you should always re-balance back to that 50/50 mix if it gets out of whack. For example, if you  don't consistently re-balance your portfolio when we have a great year like 2013, the value of the stocks in your portfolio may now have grown to 60% or more of  your total portfolio. That's not a good thing because now taking more risk than originally intended. What you should do is re-balance by selling the 10% of stock over the original 50% you decided upon. In doing so you will automatically be selling the portion of your portfolio that is at a high (stocks) and then buying the portion of your portfolio that is now low (bonds). Most investors do exactly the opposite. When the stocks in their portfolio do well, they buy more (buy high), and when they go down in value they sell them (sell low). This is exactly the opposite of what they should be doing. 

3. Tune Out the Noise: If it's not the television, it's the radio, if not the radio, then some author on the internet. We're constantly bombarded with economic prognosticators telling us what will happen next and how we can act before everything hits the fan. The reality is this: 

"The only function of economic forecasting is to make astrology look respectable."          
-John Kenneth Galbraith

If there was someone out there that could consistently predict the future, they wouldn't be telling you. Don't listen to the prognosticators, con-men and guru's, listen to history, the best guide we have in making prudent, long-term financial decisions. 

As you can see, investing in the stock market the way we suggest is not very sexy. It's a far cry from what we hear on Wall Street. There's no stock picking, market timing, hedge funds, puts, calls, or Gordon Gecko. 

But that's okay, if you're happy to take what the market freely gives you, which is high single digit to low double digit returns over a long-period of time then own a beautifully diversified portfolio, re-balance often, tune out the noise and you will make money in the stock market. It's inevitable. 

Sincerely,
Marc Giannone
marc@eatoncambridge.com
480.385.7392