By Antonio Porretta
Many people believe that the most successful investors are those who meticulously analyze trends to find the perfect time to buy and sell. Another common belief is that if you don’t do this, the best you can hope for is average investment outcomes, and you’ll never realize real financial success.
As a wealth manager with over 24 years of experience, I’m here to tell you that’s not true. You don’t need to constantly outsmart the market to be a successful investor—in fact, trying to do so can sometimes harm your overall portfolio. Here are three reasons why.
1. 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. This is a common strategy used by both portfolio managers and everyday investors alike. It may work sometimes, but it is far from perfect.
In fact, a new SPIVA report shows that 68% of active fund managers underperformed their benchmarks in 2022. 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 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.
It’s possible to be a successful investor simply by relying on time in the market instead of timing the market. The longer you stay invested in a particular asset, the more likely you are to experience growth over the long term. Considering the S&P 500 Index has averaged around 9.4% for the last 50 years, this strategy doesn’t seem all that bad. Buying and holding often results in much lower stress and a more secure investment experience for the average investor over the long term.
2. 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, 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 will likely be charged 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%.
Even if you find an actively managed fund that is able to beat the market, they have to do so by a wide enough margin to cover its higher costs and more. As such, even some funds that beat the market end up with lower returns once fees are taken into account.
3. Staying Invested Produces Better Returns
Many investors will sell their positions during times of volatility in order to avoid or reduce a loss. 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 time value of money tells us that a dollar today is worth more than a dollar tomorrow, and this is certainly the case when it comes to investing. The longer you are invested, the more likely you are to ride out the fluctuations of the day-to-day market and experience growth.
Set Up a Successful Investment Strategy
The stock market is full of surprises and can catch anyone off guard. It’s like trying to guess the winning lottery numbers; there’s almost no chance of finding a surefire strategy for timing the market. The key to successful investing is to ignore the distractions and keep your eyes on your long-term goals.
At Blackbridge Financial, we’re here to help you find, plan, and enjoy the life you’re dreaming of by matching your money with your big picture and what you care about. We’ll build an investment plan that’s strong enough to handle the market’s ups and downs. Reach out to us at antonio.porretta@lpl.com or call 704.960.9646 to schedule a free meeting and let’s find out if we’re the team you’re looking for.
About Antonio
Antonio Porretta is an independent wealth manager at Blackbridge Financial with over 24 years of experience. He specializes in helping people create, distribute, and preserve their wealth. Antonio received an executive MBA from Saunders College of Business at Rochester Institute of Technology in 2007 and also holds the Accredited Asset Management Specialist℠, AAMS® designation. Originally from Rochester, NY, Antonio has been a resident of Harrisburg, NC, since 2007. Outside of work, he enjoys playing soccer and tennis, coaching, and spending time with his wife, Laura, and their children, Cristiano, Victoria, and Matteo. To learn more about Antonio and how he can make a difference in your financial life, visit www.blackbridgefinancial.com.
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Securities are offered through LPL Financial, Member FINRA/SIPC. Blackbridge Financial is an other business name of Independent Advisor Alliance, LLC. All investment advice is offered through Independent Advisor Alliance, LLC, a registered investment adviser. Independent Advisor Alliance, LLC is a separate entity from LPL Financial.
This material was prepared for Antonio Porretta’s use.