After a brief recovery of sorts, the stock market dropped back to where it was at the beginning of February, with health care and energy stocks among the biggest casualties. Although oil prices showed some gains, natural gas slid to a seventeen-year low. Bank stocks tanked on investor fears of bad loans to energy companies.
The S&P 500 fell almost sixteen points, or eight tenths of a percent, to just over 1,900 points, and the Nasdaq fell thirty-two and a half points to almost 4,600 points—the third consecutive monthly loss for both indexes.
But the stock slide wasn’t just a U.S. phenomenon. Japan’s Nikkei 225 dropped one percent, the Hang Seng Index in Hong Kong lost over one percent and the Shanghai composite index in mainland China lost almost three percent. Stock indexes in Paris, Germany and other parts of Europe were also down.
Is it possible to discern any pattern here? Sure, one can point to the drop in oil prices. Yet during the one-day time period the above markets declined, the price of oil actually increased.
At a time when health care in this country is commanding so much attention, who could have predicted health care stocks would take such a big hit? Would an investor seeking refuge from plummeting U.S. stocks have been better off fleeing in desperation to foreign exchanges?
My point is it’s difficult, if not impossible, for an investor to build wealth safely and consistently through strategic stock picking. In their paper “The Behavior of Individual Investors,” researchers Brad Barber and Terrance Odean cite five common losing behavior patterns made by individual investors (yes, that’s you and me):
- Underperform standard benchmarks (e.g., a low cost index fund)
- Sell winning investments while holding losing investments (the “disposition effect”)
- Are heavily influenced by limited attention and past return performance in their purchase decisions
- Engage in naïve reinforcement learning by repeating past behaviors that coincided with pleasure while avoiding past behaviors that generated pain
- Tend to hold undiversified stock portfolios”
If you’re determined enough, and you have the time, you could try reading the good professors’ paper and make it your goal to avoid these and other losing behaviors when stock trading. You could try to become a much smarter investor, and thereby learn to beat the market. Good luck with that…
However, there is a simpler, much less bloody way to build your personal wealth: shifting cash and putting gains in physical gold. When there’s a time-tested tangible asset that’s up sixteen percent this year, one that performs well in economic conditions that are pummeling health care, energy and banking stocks, why would you subject yourself to a futile and costly guessing game?
Instead of trying to pick the next winner among a pile of paper, diversify your portfolio and your retirement nest egg with gold coins. Do what central banks worldwide are frantically doing: move away from risk and towards stability, value – and disaster protection.