Investor Toolkit: Why so many investors underperform the market so often

Investor Toolkit: Why so many investors underperform the market so often

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investment advice, and shows you how you can put it into practice right away.

Today’s tip: “The best way to outperform the market is to invest consistently—and to avoid going in and out of the market erratically trying to buy low and sell high.”

Most experienced investors recognize that it’s hard to outperform the market on a regular basis over long periods. However, only the successful minority recognize as well that it’s all too easy to underperform the market, often by a wide margin.

Our advice is that the best way to try to outperform is to apply our three key investing principles: invest mainly in well-established companies; spread your money out across the five main economic sectors (Manufacturing, Resources, Consumer, Finance and Utilities); and downplay or avoid stocks in the broker/media limelight, where unpleasant surprises can lead to brutal declines. But applying these principles to your actual stock purchases requires a good deal of judgment and attention. Even then, you won’t beat the market every year.

Over the course of your investment career, you can improve your chances of beating the market by investing consistently every year. That is, earmark a portion of your annual income for stock market investing every year, through good and bad markets. You could make it a fixed or rising dollar amount, or a fixed percentage. Better yet, break your yearly investment into four parts and invest each part on the same four dates every year.

Some years the market goes down, of course, and the value of your holdings will go down too. But in years of low prices, your regular savings will buy more shares—because prices are down. In years when stock prices are high, you’ll buy fewer shares, since you’ll invest the same number of dollars. Buying fewer shares when prices are high and more shares when prices are low means you’ll pay lower prices overall for your investments, and make more profit in the long run.

In the course of an investing career, you’ll also go through long periods of weak market performance that will test your patience. But investing consistently lets you profit from these sluggish periods. When markets move up, as they are now, you don’t have to try and catch up. You’re already in a position to profit.

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Stock market advice: There’s only one reliable way to buy more shares at lower prices

In 2010, stock markets were just about where they had been at the beginning of the decade. But an investor who had begun a program of consistent investment in 2000 would have gained around 30% on his or her investment. That’s because they would have bought more shares at the lows and fewer at the highs.

Of course, you’d outperform the market and make much bigger profits if you consistently bought low and sold high. But nobody does that consistently. When you try, you’ll have some successes. But in the long run you are likely to lose more than you gain.

Many investors try to outperform the stock market by going in and out of it erratically, based on their assessment of risk and potential reward. The trouble is that their risk assessments rise and fall with day-to-day or month-to-month economic and business developments, which correspond with short-term stock market trends.

As a result, these investors tend to “buy on strength,” as the saying goes. That is, they do more of their buying when confidence is high and stock prices have gone up. By then, however, much of the rise they hoped to profit from will have already taken place.

These investors are also more inclined to “sell on weakness,” when investors are generally nervous and prices have dropped. That way, they hold on to their stocks during much of the decline that they hoped to avoid. In addition, they may wind up selling at or near the bottom in prices.

It may seem like a self-evident truth, but it’s important to remember. While it’s hard to outperform the market, it’s so easy to underperform the market that some investors do it almost every year.

COMMENTS PLEASE—Share your investment experience and opinions with fellow members

Have you ever stayed out of the stock market for a significant amount of time? What prompted you to get out? Did you eventually regret it, or do you still feel it was the right thing to do? Let us know what you think.


  • Jensen J.

    I try to do as Buffett does.I buy companies,not stocks.I try to feel like I am a partial owner.Try to buy ownership,when prices are below,what I feel the company is worth.Recently buying Teck.I think it is undervalued,pays a nice dividend,that should be secure,while I’m waiting for better times,to see the company valued higher.

  • Jan M.

    Patience is the key and to not let emotion incite you to sell.

    I believe in the principle of buying quality stocks( recommended by Pat ) that are ( technically) on sale, similar to when you are buying retail goods such as clothing or cars.

    Oddly though the reverse seems to happen with many retail investors resulting in people buying high and selling low.

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