From Retirement Now Newsletter July 29th 2021
There has been a lot of research done by academics saying that it’s impossible to consistently beat the market by actively trading.
Personally, I think they are right.
But I don’t think that is what many retirees are trying to do when they actively trade their portfolio. I think a lot of investor behavior is driven by fear. Especially when we look at studies like what the DALBAR group has put out. Those studies show big underperformances between what the average equity investor receives in returns, compared to what the S&P500 returns. And the reason?
A lot of it has to do with selling after big market losses, like the 2008 crash for instance.
The difficulty is overcoming this behavior and avoiding selling after a crash.
It is human nature to think that we’ll be different, that we can do what the Wall St professionals are not even able to do. That we’ll be able to time it correctly, to get out before the crash. And then also to hop back in before the rebound.
In other words, we think that we’ll do pretty good with it.
I was reminded of this phenomenon recently when I took a day trip with some friends to an off road vehicle park. My friends were riding on four wheelers. But I was riding on my dirt bike.
For a little background, I decided to get ahead of the curve on my mid-life crisis and I got a dirt bike. So I’m something of a beginner rider. I don’t have years of experience under my belt. But I have learned the basics. And I have taken it off road in different locales in my county. And I’ve done pretty good considering the short time that I’ve been riding.
So when we arranged this trip to go to a legit off-road park, one where you actually pay to ride and the trails are maintained, I thought this would be no problem. I’m going to do pretty good with it.
Quickly we discovered the trails aren’t as maintained as we thought. And the terrain was not the West TN red clay that I am used to. Instead it was rockier. And the rocks were the size of softballs and footballs, and they were loose too. Every time my front wheel hit these on a steep hill my front forks would slide and bring me to a stop.
So I got a lot of practice in failing that Saturday. And my friends got a lot of practice in patience while waiting for me.
But before I went, I really thought I was going to do alright.
But it’s simply human nature to think that though something might be difficult for others, we’ll be able to do this.
And again, I don’t think most retirees are trying to beat the market by actively trading. In fact, I imagine most retirees (or those near retirement) are at the point where they want to conserve more than they want to grow. While growth is still important to their long-term retirement survival, preservation starts to become more important.
And that is where I believe many will try to “beat the market.” Not in upside returns, buying a stock before it takes off in value. But rather in trying to prevent downside losses.
From a retiree’s perspective, experiencing losses on their portfolio is completely different from a person that is still working.
The main reason is that a retiree understands that they won’t be earning anymore unless they go back to work, which they may not want to do, or may not be able to do.
What’s more, many retirees are dependent on their portfolio for regular withdrawals to support themselves in retirement. To watch the market drive their portfolio down, and then to compound that downward momentum by taking withdrawals just to pay the bills can be extraordinarily stressful.
That can be a scary situation. Hence, they are more likely to take action to help preserve their life savings.
So, the move to prevent losses is usually a move to prevent further losses. In other words it happens after some losses have already occurred.
But the principles of an efficient market indicate that even trying to “beat the market” on lessening the downside of your portfolio, will largely not work.
If you want to lessen downside risk in your portfolio, the real answer is to invest less aggressively. This means diversifying your portfolio into less volatile, or less risky, investments. Instead of being an all equity investor, it means incorporating some less risky (and yes less potential return) investments into your portfolio. Things such as bonds for example.
This strategy is a better approach to helping limit downside potential in your portfolio, as opposed to trying to jump out of the market at just the right time.
Conclusion: The investment markets are quite unpredictable. Yet for many retirees they are a necessary evil since they need the potential long-term growth of investments to continue funding their retirement over the next 20+ years. If you need help with how to navigate this, then feel free to click here for a 15 minute chat with me. If I can’t help you I’ll be the first to say and help point you in the right direction.