Traders: Stop Freaking Out and Just Start Doing Nothing

by Jeff Reeves | August 18, 2012 7:00 am

Traders: Stop Freaking Out and Just Start Doing Nothing

Recently, John Wasik penned a column for Reuters with the headline, “Cash not king for the risk averse[1].” 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[2]. 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[3]. 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.”[4] Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.

Endnotes:
  1. Cash not king for the risk averse: http://www.reuters.com/article/2012/08/16/us-column-wasik-cash-idUSBRE87F0Z320120816?irpc=932
  2. 84% of active managers underperformed: http://investorplace.com/2012/03/actively-managed-mutual-funds-underperform/
  3. 7 reasons why investors should stop trading until Thanksgiving: http://investorplace.com/2012/07/7-reasons-to-stop-trading-until-thanksgiving/
  4. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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