Investors Should Not Be Traders
We believe that if you adhere to an investment strategy that coincides with your objectives and the particulars of your financial situation, all the while taking into consideration your tolerance to risk, a philosophy of “buy and homework” (reviewing your investments on a regular basis or as market movements dictate) provides the most direct path to those objectives.
This belief implicitly challenges the assertion by Michael Lewis, author of Flash Boys, who in his book states that high-frequency trading (the use of powerful computers that have developed algorithms to trade stocks emphasizing the speed of the computations as a way to front trades) essentially rigs the markets against the investor. Once again, Jack Bogle steps in, observing that “these things like flash trading, dark pools and so on should mean and do mean nothing to the long-term investor. They’re simply things that traders get trapped by and often outmaneuvered in the marketplace by.”
Diversification is another way to spread risk and help you achieve your financial objectives. Since 1928, on the average the S&P 500 has gained only 1.9% during the six month period that began May first, prompting many to cry, “sell in May and go away.” However, if you adhere to this ritual, not only are you missing out on the potential for gains, but there may also be tax ramifications. Furthermore, not all sectors necessarily perform poorly during this period. Consider Consumer Staples and Health Care which, since 1928, have averaged positive returns of 4.6% and 4.7% respectively during the upcoming six months.
By constructing a diversified portfolio with a focus on the long-term, you may be able to avoid some of the historical losses that occur during this time period, as well as continue to hold the investments that you believe will move higher in the years to come.
Overall, we like where the market is going long-term and agree with the comments made by the Chief Investment Officer for the California State Teachers’ Retirement System (CalSTRS), the nation’s second largest public pension fund with more than $183 billion in assets under management. CalSTRS CIO Christopher Ailman, during an interview with Nicole Goodkind, responding to the question of where to invest these assets, and in referring to the stock market stated that “we’re trying to find a better opportunity and there isn’t much.” Although we don’t believe that investing in this manner over the long-term makes sense, for now we agree that with interest rates at multi-decade lows, the global stock market remains the only game in town.
There is still plenty of room for your growth, if you focus on the longer-term. Yes, the talk of high frequency trading is somewhat disconcerting, but by no means is it rigging the market against the investor. The individual investor still has a lot of opportunities to make sound investments. We suggest you scale back on some of the momentum names that were big winners during calendar year 2013 and focus on those large-cap, blue-chip companies that dominate their category. Diversify and look for opportunities where you may have raised cash. Be patient. You might just get some great buys at attractive prices.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.