Over the years one of the biggest mistakes I see investors make is thinking that missing a rally in the stock market equates to losing money. As a portfolio manager for over 25 years, I can tell you many professionals believe this mentality is correct. Hedge Fund managers are graded monthly against 10,000 other funds. Benchmarked managers are graded against their index and prop traders are graded against other prop traders. Because of this grading, professionals know that missing a rally is the same thing as losing money. Their bonuses, and even their careers, depend on it.
However, investors are not subject to this type of grading. Investors should only have one concern on their mind; and that is building their wealth. If the Dow Jones Industrial Average rises 25% one year and your portfolio is up 15%, you should be happy. A professional would get fired, but you should be happy. You have 15% more money than you did the year before. On the flip side, if the Dow Jones is down 25% one year, and your portfolio is down 15% you should be upset. A professional would be a hero, but you have 15% less money.
The reason I am pointing out this common mistake right now is because of the large “Trump rally” we have been experiencing since November 2016. The Dow is up 13% since Trump won the election in November.
If you missed this rally you may be kicking yourself. You may be angry that you could have made 13% in three months. Feeling this way can lead to a major mistake, because the more the market goes up, the angrier you will get. If this pattern continues, at some point you may say to yourself that you just can’t take it anymore and finally just dive into the market. And oftentimes this is right at the top of a market peak! A huge mistake and a great way to lose money.
If you have read my previous articles you will know that my opinion of the market right now is extreme danger. Valuations are high, euphoria is high, and interest rates are rising. From my perspective this is the triple warning sign for investors. For long term investors the goal should be to buy stocks when valuations are low, pessimism is rampant, and interest rates are declining. Buying under these circumstances offers a much better risk/reward for long term investors. There is no need for you to chase the market and take on extreme risk like professionals who are trying to catch up to their benchmark.
My advice is stay calm and wait for favorable conditions to invest.
Remember this rule: Missing out on a win is not a loss.