Is Your 401k About To Hit A 20 Car Pileup?
So, I’m driving home from work and traffic is awful. I’m late, I’m flustered and even worse…I’m impatient.
BUT I’m certain that I can shrink down my commute time if I can correctly pick which lane of traffic to maneuver in and out of. I daftly survey the type of cars in front of me; a minivan, a semi-truck and a package delivery truck. There is no way these vehicles are going to move fast and I’m certain the other lanes of traffic will get me to my destination quicker. As I look to my left, cars are whizzing by and moving at a much greater speed (ie, performing way better). After “researching” my lane, I decide that it’s bad and I need to get out of it.
I see my opportunity and pull into the faster lane on my left, just as the lane comes to a screeching halt. To add insult to injury, the lane I was just in starts to move forward. After a three second analysis I decide that I blew it – time to reassess. On a hunch, I think that there might be a wreck in my lane just around the corner. Looking back at the lane of traffic I was just in, I can see the cars are still flying by me. Decision time! Instinctively, I hop back into my original lane. And as luck would have it, it comes to a standstill.
And as you might guess…the lane I was just in starts moving again. I’m left with one flustered thought: I can’t win.
I am quite sure that you, like me, have found yourself in the same situation.
Guess what? This is just like investing. Investors are often looking at performance numbers and making decisions to hop from one investment to another – based on research, hunches and instinct.
In 2000, UC Davis professors Brad Barber and Terence Odean, wrote an academic paper: Trading is Hazardous to your Health. They researched a data set from a discount brokerage with anonymous portfolio information from 78,000 households. They concluded that those households that traded more often earned 7.5% less in rate of return between the years 1991 and 1996.
At blooom, we take a different approach. Instead of lumping all of your money into one investment (or lane of traffic), we place a little bit in different types of vehicles AND put them in various “lanes” (areas of the market). These are not just lanes restricted to the “highway” (US stocks), but “side roads” (international funds), and “frontage roads” (bonds) that all lead to your final destination…retirement.
The simple answer: we can’t predict which lane of traffic is going to move at what time. Anyone who says they can is lying to you.
Hopping from one investment to the other, much like hopping from one lane of traffic to the other, creates stress and often reduces your overall performance.
So next time you are tempted to make a switch, sit back and enjoy the ride.