Over the years, I have regularly addressed the psychological and emotional pitfalls which ultimately lead individual investors to poor outcomes. The internet is regularly littered with a stream of articles promoting the ideas of “dollar cost averaging,” “buy and hold” investing, and “passive indexing” as the solution to achieving your financial dreams.
However, as I addressed in the “Illusion Of Declining Debt To Income,” if this was truly the case, then why is the majority of Americans so financially poor?
But here are some stats from a recent Motley Fool survey:
“Imagine how the 50th percentile of those ages 35 – 44 has a household net worth of just $35,000 – and that figure includes everything they own, any equity in their homes, and their retirement savings to boot.
That’s sad considering those ages 35 and older have had probably been out in the workforce for at least ten years at this point.
And even the 50th percentile of those ages 65+ aren’t doing much better; they’ve got a median net worth of around $171,135, and quite possibly decades of retirement ahead of them.
How do you think that is going to work out?”
So, what happened?
It’s because investing does NOT WORK they way are you told. (Read the primer “The Big Lie”)
Here are the 7-Myths you are told that keep you from being a successful investor.
The 7-Myths Of Investing
You Can’t Time The Market.
Now, let me be clear. I am NOT discussing “market timing” which is specifically being “all in” or “all out” of the market at any given time. The problem with trying to “time” the market is “consistency.”
What I am discussing is “risk” management which is the minimization of losses when things go wrong. While there are many sophisticated methods of handling risk within a portfolio, even using a basic method of price analysis, such as a moving average crossover, can be a valuable tool over long-term holding periods.
The chart below shows a simple moving average crossover study. The actual moving averages used are not important, but what is clear is that using a basic form of price movement analysis can provide a useful identification of periods when portfolio risk should be REDUCED. Importantly, I did not say risk should be eliminated; just reduced.
Again, I am not implying, suggesting or stating that such signals mean going 100% to cash. What I am suggesting is that when “sell signals” are given, it is the time when individuals should perform some basic portfolio risk management.
Using some measure, any measure, of fundamental or technical analysis to reduce portfolio risk as prices/valuations rise, the long-term results of avoiding periods of severe capital loss will outweigh missed short term gains. Small adjustments can have a significant impact over the long run.