Stocks are having a much better year than strategists projected at the start of 2014, but that hardly means we’re a lock for current gains — or that you can’t still blow up your personal portfolio.
The S&P 500 is on track to rise 12% on a price basis for 2014, well ahead of strategists’ average forecast for growth of just 7%. That’s a terrific start, but we’re still a long way from the finish line with ample opportunity for things to go wrong.
Indeed, it’s well established that the great majority of professional fund managers fail to beat their benchmarks in any given quarter or year. What’s worse is that the average individual investor then goes on to underperform the average fund.
With no shortage of ways to undermine your own performance, let’s key on just a few easy adjustments to your investment process to make now.
With that, here are three attitude adjustments for the second half of the year that will help your returns:
Don’t Try to Time the Market
Most individual investors underperform the average mutual fund because they buy and sell at the wrong time. Human nature being what it is, most people buy stocks when they are high, and sell when they are low. This is the exact opposite of what investing is supposed to be, but such is the allure of rising prices.
Indeed, in any bubble, most of the money comes in near the top — right before the big blow-off.
No one can reliably time the market … the greatest value investors like Warren Buffett don’t even try. That’s why it’s safest to dollar-cost average into your positions, buying more shares when they’re cheaper, and fewer shares when they’re pricier.
Don’t Chase Returns
If you missed out on the market’s run so far this year, that doesn’t mean you can catch up by going 100% into stocks now. U.S. equity markets are at all-time highs, remember? The point is to buy low.
On the other hand, as we just noted, you can’t time the market, so waiting around for a correction — and calling the bottom of it — isn’t much of a strategy either.
Which brings us to global diversification. U.S. stocks are not cheap, but plenty of developed markets still offer bargains. BlackRock (BLK) likes Europe, but its favorite opportunity is Japan. “Japan is by far the cheapest developed market today, and monetary accommodation there is expected to last a couple years beyond the U.S. cycle,” says the investment manager.
Don’t Overpay for Fees, Performance
Index funds — whether they be mutual funds or exchange-traded funds — are an investor’s best friend. Hey, if your average fund manager can’t beat his benchmark, then just what are his higher fees paying for?
Nicer office furniture and maybe an aquarium in the reception area at your fund manager’s headquarters, that’s what.
No, you can’t beat a benchmark like the S&P 500 with an index fund, either, but at least you’ll only lag the index by the minuscule fee the fund charges. At the same time, a properly allocated and diversified portfolio of global index products can serve up superior risk-adjusted returns.
In closing, first-half performance was pretty solid — don’t wreck your returns in the second half by committing these investing sins.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
