Dr. Hendlin, When I studied for my MBA several years ago, we were taught the CAPM (Capital Asset Pricing Model), which says that one can never exceed the average return on your assets, i.e., stock, unless you have insider information. Since 99.99% of us don't have insider info, why do we all try to beat the market? -- M.K.
I don't agree we are "all" trying to beat the market right now. Maybe that's the case for fund managers, whose performance is always being compared to other managers and to the market as a whole. But beating the market isn't foremost on most retail investors' minds -- certainly not over the past 21 months, where most have probably been content simply not to lose most of their capital. It is more accurate to say that retail investors' desire to beat the market changes with the volatility and direction of the prevailing trend.
If everyone is trying to beat the market, how do we explain the proliferation of index funds of every kind designed to track market performance? Beating the market is more a game for traders, not investors. Microtraders "beat the market" when they get the best of a market maker for 0.25 to 0.50 points. Swing traders do the same when they take a three-point return over a few hours, days or weeks.
Investors have managed to adjust their expectations quite a bit lately -- from desiring returns of 20% or more per year to simply being content to having not
20% (or more) on their mutual funds or individual stocks. The trauma that precipitated this lowering of expectations, however, continues to reverberate, inhibiting investors' confidence in the market -- as well as their trust in sell-side research. I doubt analysts' recommendations, for example, will ever again be taken at face value by the investing public.
It is safe to say that most retail investors (as opposed to speculators) just want a decent return over the long term, as well as a sense that their holdings are relatively safe from wild manipulation by the larger market forces. The typical intermediate- to long-term investor still works pretty hard simply at not beating
What's It All About, Alfie?
Dr. Hendlin, In analyzing the trading behavior of my fellow men, do I (a) try to divine the psycho-social motivations that go through their heads, or (b) ignore the pseudo-structural weave that ties us all into this market and focus on, instead, that thing called "fundamentals," which, no doubt, everyone is looking at anyway? If I choose the former course, how much stock should I put into my own role (i.e., perception and interpretation), otherwise known as my own existential position toward these other traders? Does there exist anything such as "perfect knowledge" of the market when thinking in and of itself affects the market's position vis-?-vis me? Am I doomed to live a Hamlet-like existence of unending doubt and Lacanian self-analysis if I continue to be as self-reflective as I can potentially be? Finally, is it truly possible to embrace the tension between denying and embracing the essential indeterminacy of the market? --E.G.
Would you like a large order of fries with that? Yes, you are "doomed to live a Hamlet-like existence of unending doubt."
Time to Cut Tech Losses?
Dr. Hendlin, with a retirement horizon of approximately five to seven years, what might be the best strategy to recover from 40%-plus losses in over half of my portfolio? I do not own any individual stocks, only mutual funds. One-third of the portfolio is in cash, one-third in large-cap blend funds and the rest is mostly Nasdaq-related. Although I can wait, I'm bothered by the old, repeating reminder that "when you lose half your money, you have to double it to break even." I would be interested in your thoughts on waiting or cutting the tech losses. Thanks for your feedback and good luck with your column. R.D.
You did not mention what other retirement investments, such as real estate, company 401(k), etc., you have outside of this portfolio, if any. Nor did you mention the value of your holdings. If this is your entire retirement portfolio, and you can handle the anxiety of waiting, I would take advantage of the recent market upturn and rally in tech stocks and hold off until your fund rebounds at least 25%. Then consider selling the one-third in the tech fund, taking your 10% to 15% loss.
Leave alone the one-third in the large-cap blended fund if, upon looking at the top 10 holdings of the fund, it is not too concentrated in tech. If it is, sell that fund, too, and put that one-third in an
index fund. Also add one-half of what remains when you sell the tech fund into the same index fund, or add it to your blended fund. Put the remaining half into a high-grade corporate bond fund, or add to your cash position. Most financial planners would tell you that you are too close to retirement to risk holding a third of your money in a pure tech fund. I agree with them.
Steven J. Hendlin, Ph.D. is a clinical psychologist in Irvine, Calif. He has been in private practice for the last 25 years, investing for the last 20 years, and actively trading online as a swing trader and long-term investor since 1996. He is the author of
The Disciplined Online Investor
recently translated into Spanish. He is pleased to receive your comments and questions for publication in his public forum columns at
email@example.com, but please remember that he is unable to provide personal counseling or psychotherapy through the mail.
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