Can’t see the Forest for the Trees

Hills_BlueSkyOne of your goals as an investor is probably to accumulate enough money to pay for a comfortable retirement. But if you focus on short-term investment performance, you may lose track of the big picture and that has the potential to work against you.

Chasing Performance & Market Timing
Your investment plan gives you the freedom to make your own decisions. Since you can easily change your choices, you may find yourself becoming a performance chaser. That’s an investor who changes investments frequently because of daily market movements instead of focusing on the big picture — a long-term investment approach. But “chasing returns” by moving your money into whatever investment strategy or stock market sector happens to be doing well at the time rarely pays off in the long term.

The reason an investor would even want to try to time the market is to accomplish dual goals: preserve capital and achieve outsized returns. Moreover, the investment environment not only validates market timing, but leads investors to believe that they can and should be doing it. Additionally, investment newsletters tell subscribers when to “get in” and “get out” of stocks, bonds, and other assets. Yet financial markets are inherently unpredictable and there is overwhelming evidence that not only does market timing not work, but it diminishes long-term returns. Data shows that long-term investing, even through a stock market downturn, yields better results over the years than trying to time a decline, park capital on the sidelines, and return when “things are better.”

The Inscrutable Future
The problem with chasing returns or market timing is that it’s virtually impossible to predict how long a particular investment strategy or market sector will continue to be a top performer. Eventually, another strategy or sector will probably be in more favor, and there will be little or no advance warning to such a change in the markets. That can leave you in an unfavorable position if you changed your investments based strictly on recent performance or invested in a speculative sector of the market.

The Solution: Keep a Long-term Perspective
You may be in better financial stability by the time you retire, for example, if you use a big-picture perspective when you invest. Concentrate on your goal and have an investment plan with the potential to help you reach it. The idea behind big-picture investing is to choose an approach that offers you a realistic opportunity to achieve long-term gains with a level of risk that best suits you.

After you’ve created a plan and chosen your investments, you shouldn’t ignore market and economic developments. But you’ll generally want to stay with your plan unless you decide that changes in your personal situation or risk tolerance make an adjustment appropriate.

If you’re a big-picture investor, you can be much less concerned with what the markets do on a day-to-day basis. You won’t feel compelled to make a move every time the market fluctuates. Ultimately, long-term wealth building requires discipline and an ability to remain steadfast so that self-defeating behaviors are avoided. It’s our observation that, over time, stock prices should follow the earnings growth of businesses, regardless of inevitable short-term market fluctuations.

Please see Fenimore disclosure. 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s