How Can YOU make Money in the Stock Market ?
What does it take to make money in stocks? Research? Luck? Brilliance? Connections? Inside Information?
An academic study was done a few years ago, where 10 of the largest pools of money in the world were studied. Accounts such as the California and New York teachers retirements, the GM pension plan, and other very large pools of money were monitored for 10 years. The goal of this study was to determine the exact cause for varying performance. Some funds made money, while others lagged behind. Why? Better stock picking? Better market timing ? The results were quite interesting!
About 6% of the variance was due to stock selection. Buying Lowes instead of Home Depot, Microsoft instead of IBM, Toyota instead of GM, etc. Another 2% was attributed to timing. WHEN did they buy, and when did they sell? Over 90% of the performance variation was due to asset allocation policy differences. Buy stock or bonds? Buy domestic or international? Buy growth stocks or value stocks? Large or small companies? Manufacturing or Service sector? These decisions made the biggest difference in performance when all was said and done.
What can we learn from this? Being that over 90% of the variance was due to asset allocation policy, doesn’t it make sense that our own asset allocation policy receive our greatest attention as investors? Too often I hear “hot tips” from the watercooler portrayed as an important strategy for financial success, which is simply an inaccurate place to put your energies.
What might an Asset Allocation Policy look like for your family? Well, it might state that 60% be invested in stocks, and 40% in Fixed Income investments. That the stocks be 35% in Growth, 25% in Value. That 80% be domestic, and 20% be foreign. That the Service sector outweigh Manufacturing. That the bonds be laddered for stable pricing, and also contain some foreign government bonds.
If this were your family’s policy, it would be the most important part of your success. So instead of buying hot stocks, or trying to time the next market upturn, most of your attention should be in your policy development and refinement. Over the long run, this will determine your success or failure!
Of course having an asset allocation policy is important, but there is more to do. With roughly 13 different asset classes to manage, you must also find good managers to fill each one. Searching among over 14,000 mutual funds available, good research will yield superior managers. Once these managers are in place, they must be monitored. If they fall behind their peers, they should be replaced. If a manager leaves one fund and goes to another, you should know this. If the approach to investing that you bought originally changes, that fund might need replacing.
My suggestion is that if you don’t have the experience or ambition to develop and maintain an asset allocation policy, and select and monitor managers, you should hire a professional to do it for you.
If you retain a FEE ONLY firm to do this, their selections will be made without the bias of commissions, and selected from the entire universe, not just ones that pay commissions.. Also, a FEE ONLY firm will not hesitate to replace underperformers, because there are no commissions involved to make a trade.
So remember that, over the long term, good stock picks are offset by bad ones, and market timing has not worked consistently for anyone. Focus on what’s important; your long term asset allocation policy, patience, and attention to the performance of your managers. This is where the really savvy investor cashes in! Peyton Hawkes