How Type A’s Sabotage Their Investment Success

Filed in Money by on October 24, 2013 0 Comments

investing in the stock marketI love my Type A family and friends, I really do. They are so energetic and have such “can do” attitudes! Type As tend to be optimistic and proactive, and I prefer to be around people like that. I think you become more like the people you associate with.

A “can do” and proactive approach will serve you well in most areas of your life. Effort and hard work usually produce success. Whether it is in your career, family life, exercise, or whatever other challenges present themselves, “working the problem” usually helps.

Since I have a finance background and enjoy volunteering, I have several Type A family members and friends whom I assist with their investments. To a man/woman, they predictably and diligently apply their hard work mantra to their investing activities. Their approach almost invariably is, “I need to work hard at investing if I want to be successful at it. I can’t just sit idly by and expect my investments to grow. I need to make decisions and take action. If Tim says I can make 8% per year on my money with a ‘buy and hold’ (lazy!) portfolio, I’m sure I can earn 10%, maybe even 15%, if I just apply myself!”

It is only natural for Type As to think this way.

Natural, but also, as it turns out, misguided.

Investing is different from a lot of other disciplines, in that active managing of it can be harmful. There are a couple of reasons why “active investing,” which I define as trading your portfolio on a daily, weekly, or even monthly basis, is a loser’s game. First, let’s explore the issue of trying to “time” the market. This is an investing strategy whereby one attempts to beat the market by anticipating major economic developments or company news announcements. This is a mistake. Do you really believe you can predict next quarter’s GDP number more accurately than the 50 top economists in the nation, which is where Wall Street traders get their economic information? Do you think you can forecast Google’s upcoming earnings results better than the top management of Google, who also have the ability to trade Google stock (albeit with some restrictions)?

Good luck with that. Let me know how it’s working out for you.

Active traders also attempt to earn outsized returns by buying individual company stocks that they hope will outperform the market. Yes, I would agree that Apple, Google, Oracle, and IBM are probably the best run technology companies. Unfortunately, they therefore also carry some of the highest stock prices (relative to earnings). So where is the value there? How can you expect to earn a better than average return going forward when these stocks are already so expensive? Again, you need to be able to outsmart Wall Street insiders, who have much greater access to company management and company information than you have.

Then, consider the “drag” on your investment returns from active trading due to costs such as commissions, bid/ask spreads, taxes, etc.

When you add it all up, it is almost always a game not worth playing. As such, I have discussed the smartest way to invest and the inherent advantages of using index funds in previous money blogs.

What I tell my Type A friends is this: Adopt a buy and hold strategy for your investments, and obtain the full market return while incurring as few expenses as possible. Avoid the loser’s game of active investing. If you want to spend time making more money, rather than churning your portfolio, apply your extra effort to your career, by working toward a promotion or seeking out additional customers for your business. Or, if you are fortunate enough to not need the money, spend the extra time with family and friends. Either of these approaches will be a much better use of your time and effort.

About the Author ()

TIM MCINTYRE retired in 2004 from his position as president of Applied Systems after facilitating a successful sale of the company. At only forty-six years old, he made the unusual decision to fully retire to pursue other interests and simply enjoy free time. As a hard-driving Type A personality, this turned out to be a significant challenge for the Notre Dame and University of Chicago-educated MBA, CPA, and Certified Cash Manager.

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