Pop Goes the Investor!
(December 2004)
By Wayne Rothe, CFP
If we can count on anything about investor behaviour, it's that the typical investor does precisely the wrong thing at the worst time. Life's three certainties are death, taxes and that investors zig when they should zag. Count on it.
Have you ever watched children playing Whack a Mole? It's the arcade game where a mole pops out of its hole and the child hammers at it with a club. The child hits where the mole has just been, just as it pops up from another hole.
Wayne Gretzky always said that he never went where the puck was, but where the puck would be. He anticipated.
Unfortunately, to the detriment of their long-term wealth, investors play the financial version of Whack a Mole. Every time a market sector goes POP, they decide that's where their money needs to go. By that time it's too late.
Eventually, POP GOES THE INVESTOR as he or she self-destructs.
I see it all the time. Clients call with questions like, "My stocks have been doing lousy. How 'bout I buy real estate? It's up 50 per cent."
Good idea. Five years ago.
That's the equivalent of driving looking through your rear-view mirror. You're moving your money OUT of something that is low (equities) and INTO something that is high (real estate).
Does this sound familiar? It's the latter part of the '90s. Stocks have being doing great, particularly tech stocks. In late 1999 I had clients wanting to sell all of their conservative stuff to buy technology. We all know what happened. The tech market dropped about 70 per cent. Four years later, bonds had come through a 20-year bear market. Investors were thinking it was time to get into bonds. Alas, it was a few years too late.
On and on it goes. We watch something go up, buy it at its peak, then sell, only to buy another flavour of the month.
Left to their own devices, investors chase performance. They believe in buying low and selling high, but in practice, investors often buy high and sell low.
Here's one solution. You can devise a simple asset allocation strategy. You create five separate investments with low correlations and put 20 per cent of your money into each with no regard to what the market is doing in each sector. I know this is difficult, but the next part is even harder. At the end of each year, you sell the profits in the sectors that are up, and buy more of what's down. This will also be difficult, but it forces you to buy low and sell high.
Human beings are not capable of buying low and selling high. It's not in our DNA or something. I'd say that you need a financial planner to help you but frankly, most planners have the same DNA deficiencies. It's easy to prey on investor weakness and sell them what's been hot. It's much harder to convince a client to want what's been cold. Even when it's the smart thing to do!
But that's precisely what investors need to do. Like Gretz, don't go where the market's been. Go where it will be when you get there.
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