Assume you have $50,000 in investments and can beat the market by 2%. Remember, the Dow Jones Industrial Average has returned about 9.4% over the last 20 years. So let’s assume this year it will do the same (it won’t… it will be higher or lower but the average is a useful metric). You could do nothing but stick that 50 grand in a DJIA index fund, reinvesting the dividend and make $4,700. Or you could spend whatever time reading, writing, watching, etc., get an 11.4% return and make $5,700. All that work for $1,000 in a year. And that’s assuming a good-sized portfolio of $50,000. If your portfolio is less than that you would make even less… Now assuming it took you just four extra hours per week to get that extra 2%, that’s 208 hours in a year! Congratulations, you just made $4.80 per hour… You could make more than $1,000 in a month delivering pizzas.
Now think of it in this context: I’m reading CNBC.com the other day and a pretty interesting article caught my attention. The title? Stocks Form ‘Golden Cross’ With Today’s Market Close. The point of the article was this:
Stocks formed the much-heralded “golden cross” on Tuesday, but traders waited until the market’s [sic] actually closed before confirming it.The so-called golden cross — which occurs when the [] 50-day moving average of the S&P; 500 rises above the 200-day moving average—is considered a long-term bullish signal.
On Tuesday, the “cross” was formed just after the opening bell and managed to survive even though the S&P; closed a fraction lower.
The [] 50-day moving average closed at 1257.79, just above the 200-day average of 1257.19.
Birinyi Associates analyst Kevin Pleines said his analysis shows that when the 50-day crossed the 200-day in the 26 instances since 1962, the market was higher six months later 81 percent of the time.
Still awake? Oh oh… WAKE UP!!! Great. Welcome back.
I’ll never claim to know everything about anything but a golden cross? Seriously? Who invests like this? Please, PLEASE don’t let it be you. Let me tell you something: I understand that having the 50-day moving average (which shows the trend of stocks over the last 50 days) higher than the 200-day moving average (which shows the trend of stocks over a longer 200-day time frame) means that momentum of the stock market is positive. (It’s telling you that the market was stronger over the last 50 days, basically, and suggests that the path of least resistance is UP…)
But if you base your investment decisions on some nutso technical indicator like this you’re asking for trouble. You hear about “head and shoulders,” “reverse head and shoulders,” “cup and handle,” or “wedge pattern.” Yes, those are actual technical indicators that people follow. Interesting, but nothing to go “all in” over….
Next thing you know you’ll be running for the hills because some plaid sombrero told you the market’s going to plunge and then go all in because a purple dinosaur tells you to get back in QUICK!
So just stop. I’m convinced that the less investment TV or articles you read (except for this one, of course…) the better you’ll be at investing. In the interest of full disclosure, I do own a few individual stocks but they’re a very small part of my portfolio and I’ve been phasing them out for a while now. If all goes according to plan they’ll be phased out completely by the end of the year.
But the vast majority of my investment portfolio sits in mutual funds and ETFs, most of which are in the “index fund” variety. And let me tell you, it cuts out at least 80% of the time I used to spend watching TV and reading up on what was happening in the market or a particular industry or stock. I felt I needed to know more to make sure my portfolio held up. Now I don’t even log into my investment accounts at work. I check them once in a while on my phone in between meetings and usually at the end of the day.
But the big benefit to ignoring pink elephants and discount double checks is not doing stupid things like shorting Netflix when it was at 75 and all the “news” said they were screwed. Don’t believe me, check out the stock today. I haven’t checked in a while but I’ll bet it’s well over $100. I guaranty you a bunch of people are going to lose their shirts buying Facebook the day it starts trading on the open market for the same reason.
I’ve said it before and I’ll say it again: Unless you have buckets of money in the market (like millions, really) even a 1-2% better return than the market (which is really hard to do on a regular basis) is probably not going to be worth the extra time spent researching, reading and worrying. I would rather spend that time with my family or making more money.
Think about it this way: Look at your investment account balance. Assume you can beat the market by 2%. Now take 2% of that and write it down on a piece of paper. That’s your salary for all of the work and worry you spend researching, etc. Worth it? I doubt it.
Also, with more “human interaction” based on incomplete data or slight-of-hand investment analysis you’ll probably do more harm than good. I know I did.
So stop investing because some golden cross told you it was safe to buy, OK? Seriously… who invests like this? Keep it simple.
Until next time, put your credit card down and slowly step away from the mall!
Like what you see here? Tell your friends by sharing it with one of the buttons below. Post this to Facebook or Tweet it to help your friends and family, too. And don’t forget to send me an e-mail or comment to say hello. I love hearing from you.
Also, please join our recently-started Facebook community where I hope to build a place where we can all share thoughts, successes and support. And don’t forget to follow me on twitter where you’ll find most of the posts, random thoughts by me and more. See you there!
Image: Nutdanai Apikhomboonwaroot / FreeDigitalPhotos.net
{ 0 comments… add one now }