Learning that drives better investment decisions

Timing the Market: Now or Later?

Top 5 of the Week of May 21

Kicking off our Top 5 this week, Larry Swedroe, from ETF.com, explains how investors are their own worst enemy. The Financial Samurai Sam Dogen examines the benefits of stocks over real estate. And for Newfound Research, Corey Hoffstein considers the risks of being cautious.

Jim O’Shaughnessy, on his Tumblr blog, asks if the present really is different from the past in the stock market. And The Irrelevant Investor Michael Batnick discusses whether investors should be waiting for a better pitch across the next five years or not…


Suffering from the Disposition Effect

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  • There is lots of research to compound the idea that many investors suffer from the disposition effect (selling winners too early and keeping losers for too long)
  • The disposition effect seems to be conditioned to overall portfolio performance; there’s no effect if the remaining portfolio is up, but if it’s down stocks with gain are liable to be liquidated more than stocks with loss
  • Evidence and awareness of the effect helps us explain “behavioral-based anomalies,” and give us an idea into how to adjust for such actions

Do you know if you suffer from the disposition effect? Share your comments in the section below
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Not Just a Necessary Evil

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  • Despite the fact that stocks provide little pleasure or utility for some investors, they are a necessary evil for creating a successful portfolio
  • This is because history demonstrates over and over that stocks outperform inflation by 3-5 times
  • Not only do stocks get a higher rate of return in comparison to real estate, but they are also more liquid, and they come with lower transaction costs

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Risk Happens

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  • In an effort to exercise caution, many investors “fail slowly” when not allocating sufficiently to risky assets
  • Bonds have always been the safer option and the first approach for many to mitigate risk while still pursuing growth
  • But if a bear market occurs, bonds may not provide the same insurance as they have previously, and investors will also pay increased opportunity costs for holding bonds over equities

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Does Human Nature Change?

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  • While it’s innocent enough to believe the present is different to the past, whatever happens the inarguable truth is that stock prices are determined by people
  • If human nature and actions remains governed by “fear, greed, hope and ignorance,” stocks will continue to be mispriced
  • Which is why the key to investment decisions should always be made considering long-term results

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Timing the Market: Now Or Later?

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  • Given the current market situation, is it better for new investors to start now or wait five years when the playing field looks better?
  • Just as in 2013 when the CAPE was sitting 87% higher than other readings it seemed like the best time to hold fire and wait
  • But in the five years since then the market has reached all new highs, so while it’s tempting to time the market, it’s incredibly difficult to get it right—so you’re better off not bothering

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Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form—and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.


 

Anything you would like to discuss about this week’s top 5? Do you have another favorite that isn’t mentioned here? Feel free to add it below. Let’s start a discussion in the comments section!

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article. The Become a Better Investor Team doesn’t necessarily endorse any stocks or shares mentioned in the articles or the author of such articles linked to and summarized in Top 5 of the Week and cannot guarantee the accuracy of its information.