Being in the Right Investments

How Most People Decide What to Invest In

Few investors actually have much input in what they invest in, where they are almost always directed by others who at least have more experience with such matters. Even a salesperson at a financial institution will have a better idea of such things than someone with very little knowledge and virtually no confidence in making such decisions.

What happens in these cases is that investors will be guided by strategies that are set up to expedite the selling of investments, taking a blanket approach to the task where investors are herded in large groups to vehicles which don’t really take the needs of its investors into account that much.

Being in the Right InvestmentsWhile this grouping of investors into things like mutual funds does have some real advantages, it does have some real drawbacks as well, and one of the big ones is that these funds aren’t really attuned to either our needs or the market for that matter, they just look to draw more and more people in and hang on to their positions in hope that things will go well.

The reason why this approach has such a wide appeal it that your typical investor just doesn’t know what else to do, to the extent that we aren’t really even aware of whatever other options may be out there, and this is seen as the only game in town pretty much.

Given that we’re supposed to be widely diversified, it just isn’t practical for many investors to be able to do anything else under these constraints, and if one wanted to be exposed to something like a major stock index, we really wouldn’t want to be buying each and every component of it even if we could, since this would be not only cumbersome but involve a whole lot of extra commissions.

Therefore, what we could call herd investing has become enormously popular, although we never want to judge the effectiveness of a strategy on how popular it is, we need to instead look at how effective it may be compared to whatever else we may want to do. Of course we also need to be aware of what the alternatives may be so that we can make an intelligent comparison.

What Being in the Right Investments Means to Most Investors

When we speak of being in the right investments, we usually mean that we’ve selected the right selection of securities in our portfolio, much like an actively managed mutual fund manager would seek to put together a list of stocks that they want to be in if it is a stock fund.

This goes back to the beginning of organized markets, where people have sought to own the right assets, the ones that end up performing at an above average level, versus ones that don’t.

There are some real problems with this though, to say the least, and ones that have these mutual fund managers mostly failing in this task, where the majority of these professionals who are hired and retained based upon professional merit end up underperforming averages.

This is not to say that this cannot be done though, but if most professional investment managers fail, what chance does an individual with much less time and much less expertise have to pull this off?

So we might think, practically none, perhaps by way of some good luck that persists over time, although luck tends not to and evens out over time, especially over the long term time frames that one seeks to invest in. You might not want to stay in a position over most of your life, but your investing will occur over your lifetime, so getting lucky for a few years will likely not last and time will likely expose any deficiencies in your approach.

The deciding factor in all this is what market we’re in, where in a good bull market you may be able to pick stocks using a dart board, but being long in bear markets is a whole different story and challenge.

Focusing on picking stocks, or picking particular components of any asset class, is what gets all the thought, but success is determined far more by not what you are invested in but when you are invested in it. This critical component of investment success pretty much gets ignored by investors though, sadly.

We really need to change this task from being in the right investments to being in the right investments at the right time, and the right time part of it is going to be what ultimately decides our fate one way or another.

What Does the Right Time Really Mean?

Whenever we invest in something, we are doing so presumably because we perceive an advantage to be had should we choose to invest in it, where a certain level of profit may be expected. This is true of all investments, including ones involving securities, real estate, going into business, lending money to someone, and so on.

A good analogy of the importance of timing is if we are operating a retail outlet and looking to decide what hours of the day to be open. When the traffic is expected to be good, during the daytime hours, we want to be open, because we expect a profit during these times. At other times of day, the middle of the night for instance, if hardly anyone is expected to visit us, we may lose money, so it’s better off to not make any money during this time than it is to lose money, since it costs money to be open, to pay staff and other operating expenses.

If one’s store is in a downtown area where most people go home after 5 PM for instance, then we may want to close then, and these decisions will always be based upon the market so to speak, and our expectations at given times. Some businesses operate 24 hours but these are the ones that get enough traffic throughout the day to make this worthwhile.

What does this all have to do with investing though? Well, the same principle applies pretty much, where we want to be in investments when the going is good, and look to avoid situations where we have a clear negative expectancy, like a shop would at times where customers would not visit.

With investments, there is actually a lot more at stake than just losing a bit of money by staying open all night, and this is more akin to doing that and getting robbed during the night. While we can make a nice amount of money in the right things at the right times, we can also lose a lot when this is not the case, where we’re not in the right things or not in them at the right times.

While we might think that just being in the right things is enough, and not worry about the when part provided we might expect things to work out in the long run and provide us with an overall positive expectancy, this does not mean that this is the best approach or even the right one.

Investors do themselves a great disservice by embracing this attitude though, even though in most cases they do not even realize this, because they have become so conditioned to thinking that buy and hold indefinitely is the only sound approach and everything else is either far too difficult or far too risky.

We Need to Ask Ourselves How We Are Doing Now

The real key to sustaining a hands-off strategy is not really paying attention to how our investments are doing right now and instead just continuing to hope that things will work out for us in the end. Perhaps they will, but that doesn’t preclude us wondering if there may be a better way to manage our portfolios.

During times of particular difficulty, people do tend to pay attention more to how they are doing in the present and their prospects in the nearer future, but they will view these excursions from their desired outcomes as matters of fate, ones that we just simply have to learn to live with, while hoping that the market will change its mind and become more kind to us.

We aren’t going to generally be competent enough to select particular baskets of investments, for instance like a fund manager would do, and the best approach by far for individual amateur investors is to just go with a predetermined basket such as components of an index. For the most part, that’s what the professionals need to do as well, aside from the few that are actually talented enough to be able to add value to a portfolio by actively managing its components within a certain asset class such as stocks, or with bond components, selecting among precious metals, and so on.

The other part of the equation though, when we should be in certain investments and when we should not be, is indeed something that we can manage. Of the two, this is by far the most important element, and in almost all cases, it’s actually better not to try to manage the what and instead focus on the when part.

For instance, we might want to look at going with a stock index, which takes all of the complexities of deciding what to put into our stock basket right out of the equation, and then look to decide when the prospects of this index moving forward and providing desirable returns are good enough to make us want to be in it, and when these prospects are not sufficient enough.

Many people fear being left behind if they do this, where they may miss major moves to the upside with a stock index for instance, and in cases like this, this would result from a real lack of skill in deciding whether to be in or out of the investment. Make no mistake, there are skills involved in doing this, and the more skill you have the better you can expect to do, but the amount of skill involved in using market timing to produce better outcomes than not using it at all is actually pretty minimal and well within the reach of any investor who is minimally dedicated to achieving this.

The biggest trick to all this is to ensure that we are focused on the proper time frames, as if we are investing we don’t really want to try to be traders, and get in and out of positions too often and especially far too often. You can trade things on any time frame, from entering and exiting in microseconds like program trading does, on up, and when we invest we do need to be sure that we are trading meaningful changes in market conditions, more major reversals and not just ones that are much more fleeting and will take us back and forth too much.

Being in the right investments at the right times is very achievable, but it only is if this is actually our goal.

Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.