Why you should make money your employee

Market Realist

Why tuning out the noise will make you a better investor (Part 3 of 3)

(Continued from Part 2)

Imagine your money is like an employee: you want it to work for you. Are you going to stand over your money’s shoulder, micromanaging and questioning every single thing—and ruining its productivity? Or are you going to put it on a solid path and give it the room to succeed?

Market Realist – Reacting emotionally to the “news” without having a long-term focus may be a costly proposition. If you listen to the market news and react by jumping in and out of the market often, you run the risk of missing out on powerful rallies. The following graph shows the effects of being out of the market during strong market rallies. If we look at returns from the S&P500 (IVV) from 1996 to 2005, missing the market’s top ten days reduced the return by more than half on a portfolio of stocks, represented by the S&P 500 (SPY). Volatility (VXX) tends to come in spikes, meaning that the market swings in short bursts either up or down; amateur investors usually get scared when the market drops and they sell, missing the following strong bounce back.

But you shouldn’t have to do this alone. Those of us in asset management need to take this conversation beyond the ticker tape. Yes, investors want sophisticated analysis and carefully managed funds—but what’s most important to people is getting the products (and the advice) that will take them to the finish line.

So when you think about what to do with your money, don’t think about what’s on the news. Don’t think about what’s important to talking heads or the Twitterati. Think about what’s important to you, and what your goals are. And remember just how long it takes to achieve each of them.

The opinions expressed are current as of May 2014, and are subject to change. Reliance upon information in this article is at the sole discretion of the reader.

Browse this series on Market Realist:

View Comments (1)