This year’s stock market rally has been nothing short of impressive, with U.S. stocks posting their best quarter in nearly a decade.
Unfortunately – they did so without help from individual investors.
The hangover from the nearly 20% drawdown in the S&P 500 during the final quarter of last year stayed with investors in the first quarter of 2019, causing many to miss out on a least part of this year’s rally.
According to data from Lipper and EPFR Global, U.S. stock mutual funds and Exchange Traded Funds have seen sizable outflows since the beginning of 2019.
The data is not surprising. Successful investing comes down to managing emotions, knowing how and when to pump the emotional brakes vs. hitting the panic button and going straight for “sell, sell, sell.”
The Lipper data above suggests investors panicked and sold – typically at the wrong time.
Look, I get it – December’s sell off was fast and furious. Combine that with all the scary headlines we typically see as soon as the market takes even a slight dip and you have the makings of a panic.
Emotional selling is the reason so many investors don’t achieve their long term investment goals. They struggle to stick with a plan when it isn’t working “right now.” We need instant gratification.
But the fact is…nothing works all the time! Investment nirvana doesn’t exist…
Investors fail to heed that advice, and it’s why so many smaller, retail investors abandon their plan and chase what’s working now – they become performance chasers.
It’s a trend that’s unfortunately ever present.
But abandoning your investment plan is often a mistake that can haunt you for years.
You see, there are many investment factors (strategies) to choose from – and over time, many of them will offer various levels of success.
There’s value investing, growth investing, high dividend strategy, and momentum strategy. Here at Rowe Wealth, we’re momentum investors, as we believe this to be most effective at consistently producing the results we’re looking for.
They can all be successful – but only if you stick with it.
And…most investors can’t. When you jump from one strategy to another, based on what’s hot, well, you have no strategy at all.
Take momentum investing for example. It didn’t perform well in 2018 (many strategies didn’t).
And that’s caused some investors to rethink their commitment.
I’ve had more than one conversation – talking to investors who fear that maybe the strategy is broken, that they got it wrong.
Momentum/relative strength investing can and does work. But it doesn’t work all the time. However, it does work over time.
Take a look at the graphs below – comparing the performance of several investment strategies – including momentum investing to investing in the S&P 500.
Graph #1 is a 1 year comparison of 8 different investment strategies.
The best performing strategy last year was – not surprisingly, low volatility, using the iShares Edge MSCI Min Vol USA ETF (USMV) as a proxy.
This approach bested the S&P 500 index by 4.14%.
Momentum investing (MTUM) on the other hand, underperformed the benchmark S&P 500 over the past year by 3.03%, meaning it lost more than the S&P 500.
That means there were 5 investment strategies that all offered investors better performance on a one year basis than sticking with momentum.
And that’s what makes jumping from one strategy to another so alluring.
But you have to decide…are you an investor or a trader? Because the answer will determine how you allocate investment capital.
Traders think short term, they get in a position and out on a relatively short term basis.
But we’re investors, and investors must always avoid the temptation of investing like a trader.
Investors want to invest in a strategy that can be successful over the long haul. Something with a long history of success.
Back to our charts, let’s look at the 5 and 10 year return comparison of the S&P 500 vs. eight investment strategies.
Take a look at the top two investment strategies over a 5 and 10 year time horizon.
While momentum investing was close to the bottom in 2018, it outperformed the S&P by 15%-18% over the last 5 and 10 years – making it one of the top two investment strategies over longer time frames.
So, again, I ask you to decide – are you an investor or a trader?
If you feel like you are more of an investor, but you haven’t yet delved into the world of momentum investing, now may be a perfect time to do so.
You might want to consider scheduling a consultation with one of our financial advisors. We can use our state of the art technical analysis tools to determine if your current investments are well suited for momentum investing, as well as evaluate the risk inherent in your current portfolio.
We also have a number of models that are designed for momentum investors which you may be interested in. These models use various technical analysis techniques to determine which sub-sectors of the market are currently best suited for momentum investors and stand the best chance of outperformance.
Qualified investors with at least $500,000 of investable inventory are encouraged to click here now to book a completely FREE evaluation.
As always, invest wisely.
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