Q.: In one of your columns you warned against playing “watch list whack-a-mole.” I hadn’t heard that term before. What do you mean by that?
— Frank in Camden
A.: Frank, watch list whack-a-mole is a far too common approach that people take to their portfolios. The whack-a mole part refers to the arcade game of the same name. The player uses a mallet. When the game starts, a mechanical furry mole pops its head up through a hole. The player then tries to whack the mole on its head before it drops back into the hole. Each time a mole gets whacked, the player earns points. What makes it challenging is the playing area has several holes through which a mole may appear, the moles pop up randomly and don’t stay up long.
Because the player must act fast to do well, I sometimes use the whack-a mole moniker to describe situations in which one must go quickly from one spot to another to succeed. Many people approach financial markets this way but don’t even realize they are doing it. History shows that needing to move quickly is a low probability when it comes to financial markets.
The watch list part of the term comes from the practice whereby if a holding underperforms after one buys their investments, it is placed on a “watch list.” If the holding continues to underperform, it is sold, and a new holding is purchased. That seems like a reasonable approach to most. After all, no one wants to own laggards.
However, the watch list approach is likely to fail. Most people doing this define a good investment as one that beats a benchmark and a bad investment as one that doesn’t. The data is clear. All types of investments will from time to time lag a reasonable benchmark. This means any holding you buy that is good will turn bad at some point.
In practice, you are not going to put a holding with good performance on a watch list. In fact, you will likely hold on to it. At some point, the outperformance you enjoyed will deteriorate or disappear entirely unless you get out of it before it turns bad.
Now, if one of your buys underperforms, you have a different issue. After putting the holding on your watch list, you may end up just watching it continue to lag. Once your patience has run out you will sell. Anytime a bad holding is sold, the bad holding’s replacement must be really good because it must make up for the lost ground of that first holding.
If you aren’t careful, you end up needing to move from one holding to another quickly to succeed, selling good holdings before they go bad and selling bad ones from fear they won’t turn good enough — watch list whack-a-mole. That’s more like speculating than investing.
Due to the speed required and the frantic nature of the whacking, the arcade game can be fun to play or watch others play. If you want to treat your investments as a game, by all means have at it but for the life savings of most people, prudent long-term investing is likely a better approach.
If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.