Is It Dangerous To “Play the Market”?

CATEGORIES: Investment Viewpoints

long term investing

You know that the best recipe for long term investment success is a patient, disciplined approach.

That’s all well and good, but sometimes you feel that something is going on in the market, and you’d like to jump in and test your skill. The Dow is skyrocketing! The Dow is on sale! You want to capitalize on market moves “just this once.”

Should you give into the impulse or restrain your inner high-roller?

The “Loser’s Game”

Some time ago investment expert Charles Ellis described playing the market as a “loser’s game.” He compared it to watching mediocre tennis players go at it on the court. The winner would be the player who made fewer mistakes than the other.

The vast majority of humans – including those gainfully employed in the financial industry – beating the market is more a matter of luck than anything else, Ellis said. It’s not something that can be reliably reproduced over a sustained period of time. It’s certainly not something on which to bet substantial amounts of your retirement savings.

Games at the Periphery

On the other hand, some investors develop a natural curiosity as they become more familiar with the market. They spend more time watching the trading patterns of different indexes, funds or stocks, and want to see if they can translate this into successful decisions.

If that seems to describe you, then your best bet probably is to set aside a small amount of your total portfolio – a good rule of thumb would be no more than 5% – and put that to work as a peripheral holding.

Use a reputable account platform where you can execute your own decisions and keep costs to a minimum. (The more you trade, the more you will see just how quickly those trading costs can add up). Make sure that you stay within your limits, and don’t cash out your core portfolio when this account starts to lose money.

Stay Detached and Objective

If you set up an active trading account, refrain from getting too involved emotionally. Emotions frequently lead to irrational decisions, and those decisions lead to losses. Besides, this really is not a test of your skill — it’s a matter of luck. Don’t feel badly if you get beaten by the market more often than not. Most – and by “most” we mean almost all – professional money managers fail to beat their market benchmarks over time. So if you find yourself on a “roll,” stay humble. The “hot streak” is a statistically meaningless concept; it doesn’t exist. Enjoy your winnings when you get them, but don’t double down on a bet that’s stacked against you.

Are you a market player? Tell us what you think.


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About the Author

Katrina Lamb is a CFA for Jemstep. She has over 25 years experience in economics, finance, international development and management strategy, with a strong focus on global markets. She provides a voice of clarity, logic, and reason in an environment characterized by high uncertainty.

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2 thoughts on “Is It Dangerous To “Play the Market”?

  1. While I completely agree that trying to beat the market cannot be done sustainably over time, my experience has been that individuals trade individual stocks for reasons other than investment results. It’s a form of entertainment, in the same way that playing roulette is more fun than owning a CD. Our firm uses DFA institutional asset class funds as the backbone of client portfolios, but we advise clients that owning them is like telling a golfer that he will be a seven handicap for the rest of his life, but he’ll hever get another birdie. Our job is to maximize wealth, and not provide entertainment.

    Many individuals enjoy the thrill of victory and can tolerate the agony of defeat which inevitably goes along with it. We draw a distinction between investing and speculation, and advise clients that while there is nothing wrong with speculating, one should always segregate investment assets from speculative assets (as the author suggests).

    • Hi Peter,

      Thanks for the helpful comment! Your golf analogy is very appropriate to describing the tension between investing and speculating. We often speak of the “cocktail party factor” in the same way — many investors are more likely to be driven by investment “advice” they get over one too many gin & tonics than by a more sober analysis of long-term allocation strategies. It’s not always fun being the one who takes the spiked punch bowl away, but someone has to do it!

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