Why Hope is Not a Trading Strategy

We’ve all heard the stories of investors who made a heavy buy on a “can’t miss” investment … that missed horribly. Still, they held on stubbornly hoping that their investment would recover, but it never did. And by the time they sold their position, their portfolio was in shambles.

We’ve also heard the stories of investors who patiently – too patiently – wait for their portfolio to increase in value. They know that their conservative approach is not generating the return they need. But even though they have time to be more aggressive, they sit on the sidelines hoping that what they have will be good enough.

Both of these examples illustrate the problem with hope as an investment strategy. Let’s be clear. There is no such thing as a sure thing. The mantra “past performance does not predict future results” is as true today as ever. Hope that is rooted in a sound investment and/or trading strategy is a powerful antidote to impatience. But hope that just encourages investors to be stubborn or complacent is not a trading strategy.

News Can Extinguish Hope Quickly 

For a case in point, we look at the ongoing trade war between the U.S. and China. The dispute started with the two nations exchanging tariff threats. That was 18 months ago, and most “analysts” hoped that a resolution would be forthcoming. In fact, the market priced in the idea that a deal would be struck before the tariffs went into effect. They were wrong. But the market kept “hoping” that there would be a deal. Today most analysts are finally pricing into the market the possibility that this trade war may go on far longer than anyone can predict – with real effects to corporations in the sectors most likely to be impacted.

Here’s another example that strikes many investors a little closer to home. We recently heard that the U.S. economy, pending “official confirmation of GDP numbers” is now in its longest expansion ever - 121 months and counting. An investor has not had to be a genius to profit in this market.

Still, since 2018 the market has shown some nasty volatility that has tested the nerve of many investors. Online trading has become the new normal and many investors are now executing forex trading or dabbling in the futures and options market. This latest bull market has also introduced a dynamic new form of trading with cryptocurrencies such as bitcoin now being analyzed by the mainstream financial media, even as many retail investors are still trying to understand the cryptocurrency market and the blockchain technology that enables it. It is truly a market, unlike anything we’ve ever seen. And it illustrates even more why successful investors today need to have an informed investment strategy that is based on more than hope.

There’s nothing wrong with hoping for the best outcome. In fact, any form of investing carries with it some risk. No young investor and even many older investors can expect to achieve their investment goals – particularly to get them through a long retirement – with a portfolio that consists of CDs, Treasury Bills and perhaps a money market mutual fund. At some point, hope enters the picture.

Bottom Line - A Plan is Beter than Hope

The solution, of course, is to have hope that is based on a plan. When you have an investment strategy that takes into account the best information you have at the time, you can rest easy with the confidence that while the market may not always behave rationally, you can make rational moves to minimize your risk and maximize your opportunity for success. To put it another way, it allows you to act and not just react to the market.

And of course, no article on having an investment strategy would be complete without a reminder that diversification and asset allocation are music to every financial advisor’s ears. Part of a well-informed investing plan is a portfolio that has a mix of assets (stocks, bonds, etc.) and a variety within those asset classes (different sector stocks, stocks with different market caps, long-term bonds, short-term bonds, etc.).

Part of the greatness of America is the belief that tomorrow can be better than today. One way we define these feelings is to call them hope. Hope can be an extremely powerful force. But the nature of hope is that it believes what it wants to believe. Hope is a resource that has endless supply but limited substance. In the best case scenario (i.e. when hope is founded upon a sound trading strategy) no investment is a sure thing. However, when hope is simply hoping, it can not only be ineffective, it can be dangerous to the success of your portfolio.