Anyone who lives in the Pacific Northwest knows what summer means: A bounty of orange, "Merge Left" signs along our potholed roads. But a recent Cars.com post challenged what I thought I knew about whether to merge sooner or later in response to the signs. So it goes in investing as well, where many of our reactions to market warning signs run directly counter to our highest financial interests.
Back to that Cars.com article. When a lane closure looms, common courtesy discourages most of us from zooming up to the front and expecting to be let in. And yet studies by the Federal Highway Administration and others demonstrate that traffic flow can be improved by as much as 15 percent if both lanes are used to capacity. Everyone benefits if more drivers remain in the soon-to-close lane right up to the bitter end, and then the other drivers calmly let them in.
Who knew? Still, even in the face of hard evidence, I am unlikely to change my driving ways. On the not-so-open road, social convention and behavioral instincts are hard to overcome. It's not worth the steely stares and honking horns I'd have to endure to advance the empirically right way.
In investing, though, I'm on a mission. The stakes are so much higher here, where it's far more than a few moments of road angst; it's people's life savings that are at risk.
A recent Wall Street Journal MarketWatch piece, for example, observed that the "Dow flirts with 17000, but most people missed the ride." The article explained how many investors were "still poor as the market hit record highs." Instead of making the most efficient use of the market's gains, many investors continue to exhibit confusion and lack of confidence, veering in and out of the market and incurring unnecessary trading costs along the way, presumably in response to perceptions that particular avenues of wealth were opening or closing to them.
A separate MarketWatch article further substantiated this ill-advised behavior. In the article, "Bad move? Retirement savers flock to cash," the author cited a State Street Corporation analysis, asserting that, "Despite the stock market's five-year bull market, investors have raised their cash allocations over the past two years from 31% to 40% of their portfolios."
This, despite the fact that decades of empirical evidence have made it crystal clear: Unlike on our nation's highways, the market does not offer reliable warning signs about the road ahead.
By dodging on and off your financial route in search of the fast lane to enrichment, you are far more likely to spend more on "gas," add wear and tear to your portfolio and increase the distance between you and your desired destination than you are to advance any faster toward your goals.
Our advice? Same as it ever was. Even if other market drivers are forever misbehaving, you should heed the evidence that guides efficient investing strategy: Plan and build a low-cost, globally diversified portfolio that reflects your own goals and risk tolerances. Stick to that plan over the long haul and through varied market conditions. In the meantime, as summer beckons, why not pack up the sportster and go for a nice drive on a road less traveled?