The Simple Secret to Steady(ish) Portfolio Gains
Before stocks fell sharply in October (sliding almost 6 percent between the 1st and 15th), a small but presumably happy group of investors were on a serious winning streak.
By the end of the third quarter of this year, nearly 16 percent percent of investors in a data analysis by SigFig had registered portfolio gains for the past seven quarters in a row. And if they had strong enough stomachs to stick it out through October's wild ride, they may continue their streaks. The S&P 500 (^GPSC) is now up just over 4 percent since Oct. 1.
So how did these investors do it? What's their secret?
It's simple. The S&P 500 has also been on a seven-quarter positive streak, from the beginning of 2013 through the third quarter of this year. So that lucky 16 percent could have gotten those impressive-sounding results just by sitting tight in a simple index fund. (Direct comparisons between investor performance and the S&P 500 are not without complications. Investors' portfolios may contain securities other than equity securities and may not be as diversified as the S&P 500. The comparison between investor performance and the S&P 500 is provided as a benchmark. Investors may pay fees and expenses that the S&P 500 does not incur.)
In fact, investors tend to lag the S&P 500, according to SigFig's data. And they fall farthest behind when the index posts its biggest gains. For example, in the first and third quarters of 2013, when the S&P 500 rose about 10 percent, the typical investor gained just under 5 percent.
Is that bad? Not necessarily. That's actually the goal of a diversified portfolio, particularly as you get older: to smooth out the market's jagged edges. You'll miss some gains, but you'll also hopefully cushion yourself from some of the market's drops.
How Much Risk Do You Accept?
The key is to find a level of risk that works for you, and then stick with it. Trying to time the market simply doesn't work, and research has shown that, generally, the more you trade, the worse you do. Even pros can't beat the market: so far this year, only 18 percent of actively managed mutual funds are outperforming their indexes.
When stocks started to fall in October, some investors tried to bail out. SigFig data shows that selling activity increased by almost 5 percent between the week of Oct. 12 and the week of Oct. 19. Of course, if you sold at that dip, you would have missed the subsequent rally. The S&P 500 has now risen over 9 percent since Oct. 15 and is in the black for the quarter so far. The index -- and investors who've stuck with their plans -- just might continue that winning streak.
If you have a properly balanced portfolio, you almost certainly will lag the index. But, as SigFig data shows, when the market gets on a roll, individual investors may benefit. The key is to stay focused on the long term.
Sarah Morgan is a contributing writer at SigFig. Nearly a million people use SigFig to track, improve and manage over $300 billion in investments.