How I Learned to Stop Worrying and Love the Market

The talking heads of the financial media make it seem like you should be “beating the market,” or at least trying to. Typically, this means picking stocks that outperform broad indexes like the S&P 500 or Dow Jones, or switching in and out of asset classes at just the right time to avoid huge losses or catch huge gains. Now is the time to buy solar and short oil!

I’ve found that I started sleeping better at night once I stopped trying to beat the market.

The reality is that “beating the market” might be impossible. I’ve had successes in the past where I picked the right stock and had a big gain, but how do I know that wasn’t just luck? Moreover, like most people, I tend to remember the big winners and forget the big losers.

There are countless studies that point out the difficulty with market timing or stock picking. And besides, if those in the financial media really had a foolproof way to do better than everyone else, I doubt they’d be so altruistic as to pitch it on cable television.

I believe that without the media telling them otherwise, most people probably wouldn’t have a desire, much less a need, to beat the market. At the end of the day, most people I talk to want to know whether they will reach their financial goals. Tell them that they had a positive return last year and made progress toward their retirement goals, and they are happy. Tell them they didn’t save enough money and their returns were negative, and they are angry.

When you frame it from that perspective, you may start to wonder, “Who cares whether I beat the market?”

Did I do well last year? I saved a bunch of money in my 401(k), earned a raise, and moved that much closer to my financial goals. The answer has nothing to do with whether I beat the market, and that is comforting.

I have a two-step process that has helped me create this financial comfort. First, I took control of what I could by reducing spending, striving to advance my career, and reducing my investment costs through low-fee funds. Second, I constructed an investment portfolio that is most likely to meet my goals with as little risk as possible (I personally tolerate more risk than most people).

For people with more than enough savings to meet their needs, this might mean putting money in lower-return assets such as bonds, cash, and Treasury inflation-protected securities (TIPS). The media will say, “interest rates are rising, you should get out of bonds now!” But bonds might be just right for the investor who doesn’t need massive growth and can’t tolerate large fluctuations.

For younger people or investors with a higher tolerance for volatility and a strong desire for growth, this might mean a strong tilt toward stocks — maybe even emerging markets. The media will say, “China is in shambles, the market is over-priced, get out now!” But with a long enough time horizon, short-term underperformance is worth the chance of long-term growth.

This means changing your mindset from one of “beating the market” to one of getting what you need based on what the market can reasonably offer. It’s also critical to realize that the best way to make progress toward your goals is to control those things that you can actually influence. I’ve found that paying attention to my circumstances and controlling the factors within my grasp, and not trying to beat the market helps me to sleep better at night.

Oh, and stop using CNBC as your financial adviser.

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American Investment Services, Inc. (AIS) is an S.E.C. Registered Investment Adviser founded in 1978. AIS is wholly-owned by the non-profit scientific and educational organization American Institute for Economic Research.

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