By Dejan Ilijevski
Many people believe that the most successful investors are those who meticulously analyze market trends to pinpoint the ideal moments to buy and sell. Another widespread belief is that if you’re not doing this, the best you can hope for is average returns, never truly making strides in your financial portfolio.
As a fiduciary financial advisor with over 20 years of experience in the industry, I’m here to assure you that this is not true. You don’t need to constantly strategize or outsmart the market to be a successful investor—in fact, doing so can sometimes harm your overall portfolio and strategy. Here are three reasons why.
1. You Can’t Outsmart the Market
Outsmarting the market usually involves attempting to “buy low and sell high” by analyzing current market trends for inefficiencies or volatility indicators. This is a common strategy used by both portfolio managers and everyday investors alike. It may work sometimes, but it is far from perfect.
In fact, a new SPIVA report shows that 68% of active fund managers underperformed their benchmarks in 2022. The long-term results of this report are even more significant: 84% of active fund managers underperform after 5 years and 95% underperform after 20 years.
Not only does outsmarting the market involve guessing when to buy in, but you then have to guess when to sell. That means for every gain, you have to be right twice to make timing the market worth it. Unfortunately, market moves can only truly be spotted in hindsight, and outsmarting the market is often closer to playing the lottery than it is to an educated guess.
You can be a successful investor simply by relying on time in the market instead of timing the market. The longer you stay invested in a particular asset, the more likely you are to experience growth over the long term. Considering the S&P 500 Index has averaged around 9.4% for the last 50 years, this strategy doesn’t seem all that bad. Buying and holding often results in much lower stress and a more secure investment experience for the average investor over the long term.
2. Riding the Wave Is Less Expensive
Trying to outsmart the market has been around just as long as the market itself, and though it rarely works, many people keep trying. Not only are you less likely to outperform the market through market timing, you could further reduce your returns depending on how often you trade. That’s because outsmarting the market can be expensive.
Depending on your account type, asset class, and where you are executing your trades, you will likely be charged for every purchase and sale you make, and that’s on top of any taxes owed on gains. The more frequently you trade, the higher your transaction costs will be.
If you held the assets for less than a year, your gain will be taxed as ordinary income at your marginal tax rate, which can be as high as 37%.
Even if you find an actively managed fund that is able to beat the market, they have to do so by a wide enough margin to cover its higher costs and more. As such, even some funds that beat the market end up with lower returns once fees are taken into account.
3. Staying Invested Produces Better Returns
Many investors will sell their positions during times of volatility in order to avoid or reduce a loss. But how do they know when to buy back in? This is one of the most difficult aspects of outsmarting the market, and it often leads to much less growth than staying invested the whole time would have produced.
For instance, a recent study by Schwab Center for Financial Research found that bad market timing is worse than investing immediately, regardless of the market conditions at the time of investing. This indicates that even in market downturns, or just before a downturn, investors who invest immediately and remain invested will be better off than those who stay on the sidelines or attempt to time the market.
The time value of money tells us that a dollar today is worth more than a dollar tomorrow, and this is certainly the case when it comes to investing. The longer you are invested, the more likely you are to ride out the fluctuations of the day-to-day market and experience growth.
Set Your Investment Strategy Up for Success
We all know that the stock market is unpredictable and it often catches people off guard. Trying to pick a winning strategy that never suffers a downturn is as challenging as winning the lottery—it’s unlikely, if not impossible. A wise investment approach is one that ignores the short-term noise and focuses on the long-term gain.
At SCM Investment Services, we can help you envision, create, and live the life you desire by aligning your finances with your goals and values. We develop robust, long-term investment strategies that can weather the ups and downs of the market. Are you ready to make the most of your financial journey? To schedule a complimentary introductory meeting or request a free financial health checkup, call (612) 324-0629 or email dejan@scminvesting.com.
About Dejan
Dejan Ilijevski is Financial Advisor, Investment Manager, and Founder of SCM Investment Services, an independent, fiduciary, fee-only financial advisory and investment management firm based in Lake Elmo, Minnesota. With an evidence-based approach to investing grounded in economic theory and reliant on insights from financial science, he customizes globally diversified portfolios of mutual funds and ETFs for his clients. With 20 years of experience in the trading/financial services industry, and described as trustworthy and community-oriented, Dejan is passionate about helping individuals and families, prioritizing their best interest first and foremost.
Originally Dejan pursued a career in research and technology but was recruited by a startup trading firm at the Chicago Board of Trade. He took advantage of this rare opportunity, curious to learn more about capital markets. Dejan’s technical background provided a unique skill set, and by the end of his rookie year, he routinely transacted over $1 billion in U.S. Treasury notes daily, making him one of Chicago’s biggest bond traders. He consistently earned the highest profits for the firm for many years and continued to advance professionally in the trading arena.
With newfound experience and insight, Dejan came to realize his parents were being exploited by their financial advisor and that the financial services industry does not work in your best interest. After earning his MBA from the University of Chicago Booth School of Business, Dejan left the trading industry to start an independent financial advisory firm based on integrity and transparency and built on the belief that everyone deserves trusted, knowledgeable financial advice—blending Wall Street expertise with Main Street values.
Serving the broader community as an investor advocate, a proponent for financial literacy, and sponsoring nonprofit initiatives, Dejan is a trusted subject matter resource for many financial news media publications. He and his wife, Daniela, reside in Munster, Indiana, with their two kids. In his free time, he enjoys road cycling, reading, playing soccer, traveling, going on adventures (even skydiving!), and serving local charities. To learn more about Dejan, connect with him on LinkedIn.
