How to Invest Intelligently: Work Smart, Not Hard

One of the best things you can do is get out of your own way.

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Every month or so, I get a call or an email from an investor who sold all his or her stocks during the 2007-09 market meltdown – often sidestepping most of the damage – but has never gotten back into stocks.

The callers invariably say they want help in getting invested in the stock market again, but just as invariably, they never follow through. Their money sits in a bank account earning virtually nothing. Retirement recedes further and further into the future.

Market timing, unfortunately, is the bane of many investors. It wreaks havoc with their retirement plans. As humans, we’re programmed to do all the wrong things in investing. To be a successful investor, you must learn to resist your impulses.

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The behavioral economists, who’ve won several recent Nobel prizes, have offered clear evidence of some of the mistakes we make. The basic one: We tend to buy high and sell low.

Good investing isn’t easy. My advice? If you’re not willing to commit the time and energy to learning how to do it right, or you find you keep making the same mistakes, there’s a simple solution. Pick a good target-retirement fund that will expose you to a basket of investments that will grow more conservative as you approach and live in retirement. Put all your retirement savings into this fund. Add more regularly.

Then tune out the daily stock market news, which is almost immediately reflected in the prices of securities. Take up a hobby: golf, bridge, reading, yoga – anything but investing. The less you trade – and you should barely trade at all with a target fund – the better you will do.

The Numbers Don’t Lie

Russ Kinnel, a senior Morningstar analyst, has been tracking how well – or poorly – investors do at timing their stock purchases and sales since 2006. He does it by studying monthly cash flows in and out of stock funds.

Over the past 10 years through March 31, the average U.S. stock fund has returned an annualized 8.93%. The average investor, meanwhile, has earned an annualized 8.32%. That means poor timing has cost the average investor just over six-tenths of a percentage point per year. (And remember, the average U.S. stock fund lags Standard & Poor’s 500-stock index, so the average investor ends up even further behind.)

Investors actually are doing a slightly better job of late in avoiding the nasty habit of timing moves in and out of the market at the wrong times than they have in Kinnel’s past studies. From December 1990 through December 2016, for instance, investors lagged the average stock fund by 1.56 percentage points annually.

Why the improvement? We’d like to think it’s because investors are growing wiser. But Kinnel speculates it has more to do with the long bull market in stocks that began in March 2009. The predominantly smooth ascent of stocks over that stretch has made it relatively east to stay invested.

“When markets lurch up and down, investors tend to do worse than the markets and mutual funds because they make timing mistakes,” Kinnel says in a recent report. “Investors large and small tend to sell after downturns only to buy back in after a rally.”

In addition, investors have been flocking to the aforementioned target-date retirement funds. Investors have done a remarkable job of sticking with target funds even when the market does one of its inevitable belly flops. “Target-date funds continue to stand out for producing outstanding results for investors,” Kinnel says. For instance, over the past 10 years, the average investor in a target-date 2025 fund has actually beaten the average mutual fund’s performance by an average of 1.36 percentage points annually. Now that’s good timing.

Over the past 10 years, investors also fared well with all balanced funds, which own stocks and bonds. The average investor earned 0.3 percentage points more per year in these funds than in the average fund.

But investors had little luck with foreign growth stock funds, trailing the average fund by an average of 1.19 percentage points per year. Investors in European stock funds did the worst of any category Kinnel tracked, trailing the average fund by 10.35 percentage points per year!

Surprisingly, investors did a poor job with municipal bonds. You’d think patient, buy-and-hold investors would dominate this low-return category. But the hurricane that blasted Puerto Rico and Meredith Whitney’s earlier inaccurate prediction of doom in tax-free bonds caused investors to flee – natch, at the wrong time. For instance, investors in intermediate-term muni funds trailed the funds by 1.25 percentage points per year.

Whether it’s municipal bond funds or foreign stock funds, the bottom line is quite clear: Before you buy or sell a fund, think it over once, twice, three times. Because odds are that when your gut tells you to sell, you should be buying, and vice versa.

In short: The less you trade, the better you’re likely to do in investing.

Steve Goldberg is an investment adviser in the Washington, D.C., area.

Steven Goldberg
Contributing Columnist,
Steve has been writing for Kiplinger's for more than 25 years. As an associate editor and then senior associate editor, he covered mutual funds for Kiplinger's Personal Finance magazine from 1994-2006. He also authored a book, But Which Mutual Funds? In 2006 he joined with Jerry Tweddell, one of his best sources on investing, to form Tweddell Goldberg Investment Management to manage money for individual investors. Steve continues to write a regular column for and enjoys hearing investing questions from readers. You can contact Steve at 301.650.6567 or