At some point in the first quarter of any year, our wealth advisors often encounter questions regarding whether current investment conditions might indicate overall market performance for the rest of the year.
Though there's no shortage of "expert" predictions based on the January effect littering the financial media, the rational investor knows not to throw money after patterns. After all, as we've written about before, past performance isn't an effective way to predict future results. Making investment decisions based on market conditions during one month only serves as a distraction from your long-term financial goals.
Mythical Patterns Shouldn't be Part of Your Financial Strategies
Instead of looking to the past -- or fixating on market performance in January -- when making important decisions about investments for the future, take the time to sit down with your trusted wealth advisor and review your objectives. Your financial goals are long-term, and your investment strategies should be, too.
Studies indicate that chasing performance simply doesn't result in the return that a passive, long-term strategy offers. In fact, a 2014 Vanguard research note of more than 3,500 funds found that over the 10-year period of 2003-2013, a buy-and-hold approach outperformed a performance-chasing approach across all asset classes, from large blend to small value and everything in between.
Instead of getting distracted by the "patterns" in January, work with your wealth management advisor to:
- Set your financial goals
- Identify your risk tolerance level and your time horizon
- Ensure your assets are allocated so as to be properly diversified
Stock Picking and Market Timing: Effective Wealth Strategies?
If you follow the financial media, it's easy to get caught up in the excitement of picking that undervalued stock, selling at the just the right time, and jumping in and out of the market in reaction to volatility. But volatility will always exist, and short-term gains and losses are just that: Short term.
Unfortunately, following a short-term trend can jeopardize your long-term financial goals and security, as attempts to beat the market through marketing timing and stock picking simply aren't effective. Reacting emotionally to the ups and downs of the market comes at a cost; transactions may involve costs such as trading fees, commissions, and a higher tax burden, all of which diminish your returns.
If, despite all the evidence to the contrary, you're considering a short-term strategy, ensure that the potential for gain is greater than the costs associated with portfolio turnover. Though a passive investment approach may not be as exciting or glamorous, keeping your focus on the long term is key.