Investing in the sharemarket is not rocket science, nor is it gambling.
However, many financial advisors will have you believe it's both.
And if science and gambling had a child together, they'd call it technical analysis.
These 'advisors' use investment 'strategies' to base their — pardon me your — investing decisions on probabilities, charts and some other form of 'technical' analysis which may or may not involve candles, tea cups or a "Fibonacci level cluster" – to quote a data feed on my brokerage account.
But here's the rub: the strategies don't work.
And don't take my word for it, here's what researchers from New Zealand's Massey University found in 2010:
"Over 5,000 popular technical trading rules are not consistently profitable in the 49 country indices that comprise the Morgan Stanley Capital Index once data snooping is accounted for."
In case you're wondering what 'data snooping' is, it's simply the inference someone makes after looking at some data. In other words, the researchers tested only strategies, not people's reactions to the data.
Of course, it's far easier for your advisor, who's likely paid hundreds by the hour, to prove he or she is worth it because they have a 'ground-breaking' strategy for investing in shares.
After all, if they told you owning shares is just part ownership of a business, it'd be too simple. Heck, you could even do it for yourself, god forbid.
Slowly, more people are recognising sharemarket investing is not something for the rich or famous, or bankers at the top of a 100-storey building.
Indeed, today it's easier than ever to stick your super in a managed fund or pool your savings in an exchange traded fund (ETF), like the Global Consumer Staples ETF (ASX: IXI) or the S&P 500 ETF (ASX: IVV). It's also easy to open an online share account for free.
However, if you do intend to open your own share account – like me – I urge you, please, avoid any strategy which:
- Uses charts;
- Attempts to time the market;
- Mentions the words, "breakout", "resistance", "proprietary" or "platform";
- Is short-term focused (i.e. less than three years); or
- Promises something too good to be true
Indeed, these get-rich-quick schemes are the easiest sells for any rip-off merchant.
And according to Columbia University professor Bruce Greenwald, 70% of "active" investors are believed to perform worse than "passive" investors. Passive investors include those who make use of managed funds, rather than investing directly in individual shares.
Foolish takeaway
If you intend to take your finances into your own hands, remember, shares represent part-ownership of a business – nothing more. And if you think you can time the market by jumping in-and-out of shares of companies like of Commonwealth Bank of Australia (ASX: CBA) or BHP Billiton Limited (ASX: BHP), you're wrong.
Just imagine if they called it the "business market", rather than the "share market" – I know I do.
