Why You Don’t Need to Outsmart the Market to Be a Successful Investor
By Bryan Lee, CFP®, MBA
There’s a common misconception that the most successful investors are the ones who analyze trends carefully to find the perfect time to buy and sell. There’s another common misconception that if you’re not doing that, the best you could ever hope for is mediocre investment results, but you will never experience true success.
As a financial advisor with over 27 years of experience in the industry, I’m here to tell you that’s simply not the case. You don’t need to plot and plan and outsmart the market to be a successful investor—and sometimes doing so is actually detrimental to your overall 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, or by picking individual stocks or overweighting certain categories of investments based on the latest news or economic data points. This is a common strategy attempted by both portfolio managers and everyday investors alike with often underwhelming results.
In fact, a new SPIVA report shows that 68% of active fund managers underperformed their benchmarks in 2022. You may be thinking then that you’ll just pick the managers that didn’t underperform. However, 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 also 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 diversified investments, the more likely you are to experience growth over the long term.. Buying and holding often results in much lower stress and a more secure investment experience for the average investor over the long term. While it does mean riding out bear markets, continuing to buy investments systematically throughout market downturns can improve long-term returns because it results in buying more shares at lower prices.
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 in the long-term, stories about somebody that has done it circulate and as a result, 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 may be charged fees or commissions 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% (plus Medicare surtax and state income tax, if applicable).
Further, asset managers charge fees that are higher compared to broadly diversified ETFs or mutual funds. Even if you find an actively managed fund that is initially able to beat the market, the fund managers have to do so by a wide enough margin to cover its higher costs. 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” (forgetting that it’s only a loss “on paper” until they sell). 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 that bad market timing is worse than investing immediately, regardless of the market conditions at the time of investing. This indicates that 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 longer you are invested, the more likely you are to ride out the fluctuations of the day-to-day market and experience growth.
Do You Have a Successful Investment Strategy?
The market is unpredictable and often takes even the most publicized soothsayers and talking heads by surprise. Like picking the winning lottery numbers, the odds of picking a winning stock market strategy that never takes a tumble are pretty low—if not impossible. A successful investment strategy is one that can tune out the noise and focus on the long term instead.
At Strategic Financial Planning, we can help you discover, design, and live the life you want by aligning your finances with your vision and values. We’ll design a strong long-term investment strategy that can ride out the waves of the market. Call (972) 403-1234 or contact us online to set up a complimentary get-acquainted meeting so we can see if we are a good fit!
Bryan Lee is the founder and president of Strategic Financial Planning, Inc., an independent, fee-only financial advisory firm. With more than 27 years of industry experience, Bryan uses a unique client-first financial life planning approach and process to help his clients get the most out of life. Bryan earned his Bachelor of Business Administration in finance and his MBA in international finance from the University of North Texas. He is also a CERTIFIED FINANCIAL PLANNER™ professional.Bryan is actively involved in his community and industry and has served on the boards of several associations and charities, including the Dallas/Fort Worth chapter of the Financial Planning Association, the National Association of Personal Financial Advisors, Family Services of Plano, the CITY House, and the Journal of Financial Planning. Bryan has been featured in local and national media, including The Wall Street Journal, Investors Business Daily, CNNfn, USA Today, SmartMoney, Kiplinger’s Personal Finance, Financial Planning Magazine, The Dallas Morning News, and Dow Jones Newswires. And, he has been recognized as a Five Star Wealth Manager and one of Dallas’s Best Financial Planners in D Magazine every year since its inception and recently as a Top Wealth Manager. To learn more about Bryan, connect with him on LinkedIn.