Why Being Proactive With Your Portfolio Is Irrational

Last Updated Jun 16, 2009 6:25 PM EDT

This is part two of a three part series on rational-sounding investment myths. On Monday, I wrote about why following your instincts can lead to disaster. Now I'm going to address my favorite pieces of wisdom from my favorite market gurus, aka stockbrokers.

Myth #2: It's important to be proactive

I often lecture myself, after the fact of course, that I should have been more proactive about whatever it was I should have known was coming. Being proactive in life is great. How does it translate to your investing? In a word, poorly.

Not to hear the many media gurus tell it. They claim to have sold before a market downturn and preach the virtues of being proactive. It's important to get out of the market or a particular sector when the warning signs are there, or so the argument goes.

Well, I've started tracking some of the timing advice that came from these gurus. I figured they would have at least the randomness of the 50/50 coin-flipping odds in their favor, meaning that I expected them to be right about half the time. But surprise, surprise -- they weren't even close to this batting average. I also noted that not one talking head ever copped to being wrong. If only the weather forecaster had it so easy.

One radio guru in my town of Colorado Springs is the poster child of proactive since he seems to spout the word more than anyone. One example of many of his proactive moves was to tell his mother to get out of the stock market just as it was bottoming out last March.

I'm not sure why I was surprised at how poorly their proactive advice performed. Studies have consistently shown that the more one tries to time the market, the lower the performance. So my advice is to remember it's time in the market rather than timing the market. Investing is one of the few areas of life where being lazy trumps being proactive.

On Friday, I'll address one final investing statement -- "If you want a great money manager, you need to pay for it."

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.