Some quotes are so memorable they stay with you and impact your life. Here’s one, attributed to Michael Shermer, that should guide the way you invest:
Humans are pattern-seeking, story-telling animals, and we are quite adept at telling stories about patterns, whether they exist or not.
Many investors premise their decisions on the detection of patterns. They look at historical returns of a stock or mutual fund and extrapolate future returns.
They are guided in their search by pundits who appear on cable news and in the print media and weigh in with predictions ranging from which stocks to buy to whether the market will tank or take-off.
There’s even an entire industry devoted to “technical analysis” which attempts to predict price movements by using charts and statistics.
I’m suggesting an entirely different approach to investing: Give up the search for patterns.
A better alternative
The track record of pattern seekers isn’t encouraging.
If there were patterns to be found, you would think fund managers of actively managed funds could profit from them. Apparently, they can’t.
According to reports prepared by Standard & Poors, 78.52% of mutual funds using the S&P 500 index as their benchmark, underperformed this benchmark over a five-year period ending June 30, 2019.
If these highly paid “experts” have such a dismal track record, do you think you can do better?
Take the time you spend listening to those who claim to have pattern detecting expertise and use it to focus on:
- Your asset allocation (the division of your portfolio between stocks, bonds and cash.)
- Investing in a globally diversified portfolio of stocks and bonds, using low-cost index funds and ETFs.
- Minimizing the tax burden of your investments.
These factors are 100% within your control.
Finding patterns – assuming they exist – isn’t.