Can your behavior make a difference in the returns you get on your investments? And can unwise behavior actually sink your chance at a good return?
What you do can hurt you
This is probably news to exactly nobody, but investor behavior makes a huge difference.
Consider the example of CGM Focus, the best-performing stock mutual fund for the decade ending in 2009. (A side note…after 48 years of business, the CGM Focus fund shut its doors in early 2016.)
Kenneth Heebner was the man in charge of that fund–which once had $3.7 billion in client assets. Get this: the fund averaged an 18% gain annually for that decade, outpacing its closest rival by more than three percentage points! CGM Focus gave investors incredible profits. Or I should say, it rewarded all its loyal investors who stuck with the fund through thick and thin.
In actuality, the typical CGM Focus shareholder lost money. How much? According to Morningstar research, an average of 11% annually over that 10-year period. Sounds impossible, doesn’t it? How can people average an 11% loss per year for a decade, while participating in a fund that’s averaging an 18% gain annually over 10 years?
The answer has to do with–you guessed it–investor behavior.
If you remember, the 2000-2009 decade was a time of enormous economic volatility. We’re talking about a financial roller coaster! The decade began with the dot.com crash in 2000. This was followed by the housing market crash of 2008.
We’ve all seen what people tend to do in times of economic instability. Skittish and nervous, they often make financial choices that, in hindsight, prove to be unwise.
That’s precisely what happened with so many clients of CGM Focus.
During 2007, for example, the fund surged 80%! This prompted profit-seekers to pour $2.6 billion into the fund. But then, when the fund dropped 48% in 2008, many investors pulled their money out, causing them to miss the first 11 months of 2009, when the fund was up 11%!
Essentially what you had for a decade was people putting their money in CGM Focus after the fund racked up huge returns (thereby committing the investing “sin” of “buying high”). Then, whenever the fund started dipping and dropping–which all funds do–many frantically pulled their money out (thereby breaking the age-old investing rule against “selling low”).
These understandable but unwise actions proved–once again–that trying to “time the market” just doesn’t work. Waiting for a fund to go up before investing and removing your money after it has dropped isn’t a recipe for investment success.
What about your TSP?
The funds in your TSP are probably not invested using an approach as aggressive as the approach Kenneth Heebner took. As a result, you may not see the kind of wild swings I just described. Even so, your investor behavior matters.
Don’t just “go with the flow.” It makes more sense to figure out your risk tolerance…and then set up a portfolio that closely aligns with your “investment personality.”
Whatever portion of your money you want to expose to the stock market, put that in the stock market. Realize the market will have some good times—and some bad times. But leave that portion of money you’ve earmarked for the stock market in the market. Don’t jump in and out, in and out. Let your investment ride out the highs and the lows. Historically, this approach has yielded the best results.
Trying to time the market is difficult even for the smartest expert. Trying to do that with your retirement account when you’re focused on your job and other responsibilities–and when you’re probably not up-to-date on the latest economic trends is not likely to end well.
The CGM Focus fund investors who enjoyed amazing returns from 2000-2009 were the ones who left their money invested and hung in there during the decade’s turbulent periods. (Again, it only makes sense to let your money “ride it out over time” if you’re comfortable with the risk of having those assets in the stock market.)
Determining your behavior
So, the question is, how much of your retirement portfolio do you want to use to participate in the stock market? Notice, I said, “Participate in the stock market,” because sometimes the market goes up, and you’ll participate in those gains. Sometimes it goes down, and you’ll participate in those setbacks. How much of your portfolio do you want to participate in?
If you set up your investment strategy correctly, then the need to try to time the market and move in and out will be less enticing.
The case of CGM Focus is just one example of how chasing returns doesn’t always work out for your benefit, and actually, in the case of many CGM Focus investors, it was to their detriment.