The truth is, no one can say for sure when the market will go down or go up. An interesting study by Bloomberg showed that the companies Wall Street analysts said to “sell” outperformed the market by 25 percent, while the stocks they said to “buy” underperformed by 7 percent. In other words, if you had followed the opposite advice of Wall Street professionals, you would have outperformed the S&P 500 by 7 percent!
Then what is the best way to make money in the stock market?
First and foremost, getting out of the market completely is not the
answer. The greatest risk facing Americans today is longevity risk –
running out of money. Investing in the stock market over the long term
is one of the best ways to keep up with inflation and, if invested
smartly, reduce your risks while maximizing returns and income.
Here are the steps to follow for long-term success in the stock market.
* Don’t try to pick stocks
* Don’t try to time the market
* Invest in a low-cost portfolio with a diversified asset allocation
According to a study by Ibbotson Associates, a portfolio’s performance is based on:
* Asset Allocation Policy – 91.5 percent
* Security Selection – 4.6 percent
* Market Timing – 1.8 percent
* Other Factors – 2.1 percent
Trying to pick the right stocks and timing the market only make up
for only about 6 percent of a portfolio’s performance, yet make up a
considerable amount of a portfolio’s losses! You have a greater chance
of losing money than making money if you try to actively beat the stock
market. In fact, over a three-year period, 90 percent of actively
managed mutual funds lag behind the market.
A portfolio’s long-term performance is determined primarily by the
percentage of investments in each class: cash, stocks, bonds and
alternative investments. This helps protect your assets while maximizing
growth potential. This percentage is based on your time horizon, risk
tolerance, goals and financial plan.
-- David Chang, MidWeek, January 15, 2014
AAII Asset Allocation Models