Addicted to CNBC’s breathless market updates? Fascinated by hot investments of the moment?
Sorry, the data say that sticking with one investment strategy is a better by far vs. chasing higher returns by constantly switching from one investment to another.
Like a successful marriage, a profitable investment strategy is sustained over the long term, good times and bad.
Research by Morningstar shows that the average investor in stocks and bonds earns less than the total return on the stock and bond markets due to changing investment strategies.
Investors who constantly switch strategies waste time and pay unnecessary fees and taxes. They also tend to sell securities as prices fall and buy them when prices rise.
Translation: They buy high and sell low, the opposite of investing.
In fact, sticking with what turns out to be a less-than-perfect strategy in terms of return ultimately generates better returns than using a series of strategies.
Some long-term investment strategies worth considering include avoiding “home bias” by investing in both domestic and foreign markets.
The Standard & Poor’s 500 Index of stocks has limited exposure to any single domestic stock or industry. But investors in the S&P 500 can diversify further by putting money in foreign stock markets.
One way to avoid home bias is by investing in a fund such as the Vanguard Total World Stock ETF.
Vanguard’s exchange-traded global fund holds nearly 8,000 stocks.
More than half of them are stocks of such U.S. companies as Amazon and Apple. The rest are stocks of foreign companies including Samsung and Toyota.
Active strategies to consider
Investment strategies based on value and momentum also can boost returns over time. A value strategy involves investing in assets that are cheaper than comparable assets.
Momentum strategies involve buying assets that have shown strong appreciation in recent months on the theory that the strength will continue.
Examples of the momentum and value approaches to investing are found in two exchange-traded funds.
These are the iShares Edge MSCI Momentum Factor ETF and the iShares Russell 1000 Value ETF.
Finally, giving equal weight to different assets in a portfolio is an indexing strategy that limits overexposure to any single asset type.
Research shows that equal weighting improved returns by 1 percent to 2 percent over the last 40 years, compared to other indexing strategies.
Ongoing portfolio rebalancing is a feature of such funds as the iShares MSCI USA Equal Weighted ETF. On a quarterly basis, the fund rebalances to give equal weight to about 600 stocks.
Equal weighting requires a large volume of trading, however, so it it probably a useful strategy only for investors in highly liquid markets.
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