Attempting to time the market frequently leads to underperforming portfolios and disappointed investors. Yet employing buy-and-hold investment strategies, incorporating long-term alternative investments, and carefully monitoring progress against specific life goals can lead to a wealth-generating portfolio with the potential for long-term success.
Investopedia puts it this way: “If volatility and investors' emotions were removed completely from the investment process, it is clear that passive, long-term (20 years or more) investing without any attempts to time the market would be the superior choice.”
As the best gardeners know, reliable, long-term growth takes time and careful cultivation. The same is true for a successful portfolio: investors need long-term professional management that works behind the scenes, along with a diverse blend of stocks and alternative investments such as private equity real estate. At JTOO Ventures, we plant capital into fertile, high-yield opportunities so our investors can passively monitor their growth and free themselves from the stress and anxiety of trying to time the market.
The Unbearably High Cost of Market Timing
Market timing is an investment strategy in which investors attempt to predict the market’s future performance. Usually, investors make these predictions based on speculation, past performance, or mathematical assumptions. Unfortunately, studies have shown that “past performance was not an indicator of future outcomes 96.22% of the time,” hence why most mutual funds come with fine print that reads: “past performance is not an indicator of future outcomes.”
Still, many investors blatantly reject well-documented research and continue to predict how the market and specific industries and funds, will perform. Using those predictions, investors then make decisions about when to be in the market and when to get out. Although market timing allows for potentially higher returns, there are a number of reasons why the practice is not recommended even for professional investors.
According to Merrill Lynch, “One of the biggest costs of market timing is being out when the market unexpectedly surges upward, potentially missing some of the best-performing moments.” Essentially, if an investor misreads the market and isn’t invested during peak months, they could incur huge losses.
In addition, even the brightest minds don’t have a great track record when it comes to analyzing and predicting market trends. Data from numerous sources, including the SPIVA U.S. Scorecard from the S&P Dow Jones Indices, shows that active managers frequently underperform. During a 15-year period, “92.2 percent of large-cap managers missed their marks, while the number was 95.4 percent for mid-caps and 93.2 percent for small-caps.” In Dalbar’s 22nd Annual Quantitative Analysis of Investor Behavior, the data “shows that when investors react, they generally make the wrong decision.”
Disciplined Advisors Prefer Buy-And-Hold Investing
With the well-documented pitfalls of market timing, many sophisticated investors are now demanding buy-and-hold investment strategies. As the name suggests, this long-term approach involves buying and holding investments for a long period of time, which allows the market to move through its natural cycles without negatively impacting your portfolio.
Buy-and-hold investing is an excellent complement for goal-based investors, as it requires looking toward the future instead of being fixated on outperforming the stock market today. Hugely successful investors like Warren Buffett and Peter Lynch are often remembered for their buy-and-hold investment approaches. Their strategies focus on the long-lasting, underlying value of each investment, not its day-to-day market swings.
In a CNBC interview, Buffett discussed why buy-and-hold strategies are the most successful approach. According to the billionaire and philanthropist, “The money is made in investments by investing and by owning good companies for long periods of time.”
Of course, the buy-and-hold investment strategy still requires ongoing maintenance and professional management. Yet this long-term strategy has proven to be significantly more successful than attempting to time the market. The Dalbar study clearly finds that disciplined investors with long-term time horizons are more likely to reap the rewards that the market has to offer.
Why Long-Term Investors Choose Private Equity Real Estate
So where do buy-and-hold investors like to put their money? Actor Will Rogers puts it best: “Don’t wait to buy real estate. Buy real estate and wait.” Private equity real estate is extremely well-suited for long-term, buy-and-hold investors. Since real estate prices aren’t correlated to the cycles of stocks and bonds and are driven more by supply and demand than market speculation and timing, returns are higher compared to other alternative investments with similar expected risk.
Not only is real estate less volatile than the stock market, it’s also more predictable: many investors trade stocks speculatively, but when you invest in real estate, you are investing in a physical piece of land—a tangible building with a solid underlying value. As the world population continues to rapidly grow, so does the demand for high-quality real estate, especially in the main metropolitans of the fastest growing cities.
When exploring how the length of an investing period impacted annual returns from 1928 to 2014, Betterment clearly demonstrated: “Amongst all the edicts investors should heed, one stands out above all others: It’s time in the market that builds returns, not market timing.”
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