The Irony of Self-Preservation in Investing
Goodlettsville, TN (PRWEB) July 08, 2013 -- The Wall Street Journal recently reported that many investors sold stocks and moved to the sidelines. Mike Cherney (“Investors Take Refuge in Cash,” June 28, 2013 – the entire article is available to Journal subscribers) wrote:
Amid the recent turmoil in financial markets, investors are finding some refuge in cash, analysts say.
Bond and stock mutual and exchange-traded funds saw outflows of $19.96 billion in the week ended Wednesday, June 26th, according to Thomson Reuters unit Lipper. This data covers funds that report weekly.
That is the biggest outflow since August 2011, as the euro-zone debt crisis was intensifying and worries about the U.S. debt ceiling were coming to a head.
Paul Winkler, founder of Paul Winkler Inc. investment advisory firms in Nashville, Tenn., sees this retreat from stocks as short term thinking, unfortunate and not in the best interest of most investors. “The sad thing about this is that investors and investment advisors might look at this as ‘self-preservation.’ You take money out of stocks when things look uncertain and, in reality, this is nothing but ‘market timing.’”
“Market timing” is the practice of trying to predict every aspect, and whim, of market trends and other financial conditions, and to move investment money around according to those guesses. Winkler sees this as counterproductive investing.
“Investors often decide whether or not to hire financial advisors based on whether they will actively manage the portfolio,” Winkler explains. “The hiring of an advisor, and investment decisions, often come down to a simple question: What is the advisors’ performance history? What the investing public doesn’t realize is,” Winkler warns, “if they are looking for short term success, they are looking for investment professionals who simply gambled and got lucky.”
Winkler looked at the performance of mutual funds over five-year periods (using information taken from the Center for Research in Securities Prices). He found that a mere eight percent of the top 25 percent of mutual funds (sorted by performance compared to their benchmarks) from 2002-2006 were again in the top 25 percent in the following period, ended 2011. As revealing, 72 percent of the top performers had ended up in the bottom 50 percent or didn’t even survive to the end of the second period (information taken from the CRSP Survivor-Bias-Free US Mutual Fund Database).
“There will always be a few people who miss further downturns by getting out before it continues to go down. The problem is that they will miss upturns, too,” Winkler says.
He points out that after the last large outflow by investors from the stock market, in August 2011 – mentioned in the Journal piece – the S&P 500 went up an impressive 18 percent, over the following 12-month period. Investors who had gotten out of stocks in August 2011 had likely missed out on some solid returns.
Winkler often tells his radio audience a sports story that conveys his dislike of shortsighted investment strategy. “I was a lousy football player,” Winkler starts. “My biggest mistake was that I was always playing to avoid getting hurt. The end result was, ironically, that I often brought on the very injury that I was trying so hard to avoid.”
Winkler concludes, “The trouble with investment market timing is that you have to be right twice – when you get out and when you get back into the markets.”
Source: CRSP Survivor-Bias-Free US Mutual Fund Database.
By Jon Osterholm, Warehouse Multimedia Inc.
About Paul Winkler of Paul Winkler Inc.
Paul Winkler, QFP, ChFC®, RFC, CLU, LUTCF, CASL, AAMS, is the President and founder of Paul Winkler, Inc., a registered investment advisory firm located in Goodlettsville, Tennessee. Paul began his career in the financial services industry in 1989 and has been published extensively in both industry and non-industry publications. In addition to being the host of the long-running radio program "Investor Coaching Show" on WWTN, he has been a guest on multiple radio and TV outlets nationwide.
Paul's unique approach to the world of investing and financial planning stems from his strong belief that the traditional approach to the discipline is often driven more by marketing and sales of financial products than it is by sound investment philosophies. Paul is the author of the book "Above the Maddening Crowd" which is endorsed by many financial teachers and university professors around the country.
PR Contact Warehouse Multimedia Inc., Anthony Zecco, 615-420-6153
Anthony Zecco, The Warehouse Multimedia Inc., http://www.deltacountryjam.com, 615-420-6153, [email protected]
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