Recently, John Wasik penned a column for Reuters with the headline, “Cash not king for the risk averse.” He wrote about the trend to avoid selling out entirely but rather to chase the next big thing — dividend stocks, bonds, whatever.
Here’s a great line from his closing:
“Instead of beating a hasty retreat to cash every time a sour headline emerges on the U.S., European or Chinese economy, if you’re a long-term investor focused on inflation-beating growth, you could avoid the opportunity risk trap. Then you wouldn’t have to worry whether the current rally or sell-off will last or how to best time your move.”
Individual investors should know better. It had long been chronicled that most active funds underperform the indexes — so if Wharton MBAs and dudes with slick suits and a Series 7 can’t beat the market by trading frantically, that should tell you how hard it is.
In 2011, for example, 84% of active managers underperformed. Yikes.
Beating the market through active trading is not impossible, of course. Some individual investors are savvy enough to cash in on some great calls and great market timing — and they should be proud of their skills.
But for others, especially those with full-time day jobs or a desire to golf and see the grandkids, there is a lot of sense in simply letting it ride in a diversified portfolio over the long term.
I wrote a column in July outlining 7 reasons why investors should stop trading until Thanksgiving. In it, I outlined macro risk and a case for a choppy market in general.
But notice that I didn’t say go to cash. I just said do nothing until the dust settles.
Or as Wasik writes, “You need to consider a well-rounded portfolio of all sizes of growth and bargain-priced value stocks — and more. Nothing is guaranteed going forward, of course. The point is to take a more global view of different asset classes.”
It’s investing 101 — don’t put all your eggs in one basket, and take a long-term outlook.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.