An interesting article on IFA online today likened investors to pigeons. While some might say that this is a little offensive, the similarities can be stark in some cases, when it comes to investing.
The premise of the report is an experiment in which pigeons were given a red light and a green light to peck on. The green light would dispense food 60% of the time and the red light would only give a morsel of food 40% of the time.
Now it seems obvious that the pigeon should continuously peck the green light, as this is the one that will distribute food most often. What the pigeons did however, was try to “time” their pecks and they would peck the green light 60% of the time and the red 40%.
What they were in effect doing was trying to “time the market”, thinking that they could correctly select which light was going to give food at any given time. It goes without saying that this was not a good strategy and the pigeon would have been more successful by sticking to the green light alone.
Investment markets are cannily similar to the above example and markets post gains in around 60% of months and losses 40% of the time. The issue is knowing which months will be winners and which losers. Some people will try to “time” their entry and exits from markets to take advantage of its ups and downs, however this is a strategy most likely destined for failure.
Multiple studies have shown that long term “buy and hold” investors are far more likely to be successful than short term traders. While there is an argument for small “tactical” allocations into different markets to take advantage of opportunities, the general position within a portfolio should be long term holdings.
As investors we need to “control our inner pigeon” and make logical, long term investment decisions, otherwise we will find ourselves pecking more lights than we need to and receiving less food!
