THIS WEEK’S FOCUS

Common Investing Pitfalls—and How Automation Helps You Dodge Them 🤝

IInvesting can be a lot like navigating a maze—full of twists, turns, and unexpected dead ends. The smartest investors are those who learn from the missteps of others and build strategies that steer clear of common traps. This week, we’re exploring the critical mistakes that investors often make and how embracing automation can help you sidestep them with ease.

INVESTMENT OPPORTUNITY

Strategy Spotlight: AAPL GOOG Arb 🧑‍💻

When it comes to crafting effective, data-driven strategies, the AAPL-GOOG Arb stands out as one of our most innovative algorithms. This rule-based strategy leverages the price relationship between two of the world’s most dominant tech stocks: Apple ($AAPL) and Google ($GOOG). By closely tracking the divergence between the two on an hourly timeframe, our algorithm seizes trading opportunities with a well-defined, disciplined approach.

The Trading Logic

The core idea behind the AAPL-GOOG Arb is simple yet powerful. Historically, $AAPL and $GOOG exhibit price movements that are often correlated due to their similar sector and market capitalizations. However, even the strongest correlations can occasionally break down, creating a window for strategic trades.

• When $AAPL underperforms $GOOG, our algorithm detects this discrepancy and buys $AAPL, anticipating a rebound or correction in the spread.

• Conversely, when $GOOG underperforms $AAPL, the strategy flips, buying $GOOG instead.

This approach is inherently long-biased for both Apple and Google, capitalizing on temporary divergences to position for gains in either stock. The idea isn’t just about buying the dip, but exploiting the temporary mispricing that market volatility and investor sentiment can create between these two giants.

Why This Strategy?

The AAPL-GOOG Arb strategy excels in a few key areas:

1. Efficient Market Exploitation: By monitoring the hourly price movement between these two stocks, our algorithm takes advantage of short-term misalignments, allowing for more agile and effective trades.

2. Data-Driven and Rule-Based: It operates with a strict set of rules, reducing human error and emotional biases that often cloud judgment in volatile conditions.

3. Lower Market Exposure Risk: The strategy’s long bias towards Apple and Google ensures exposure to two of the most dominant and stable tech companies, while the arbitrage element focuses on managing market risk effectively.

This strategy offers a calculated and innovative approach to harnessing opportunities within two of the most heavily traded tech stocks. Ready to elevate your investment game? The AAPL-GOOG Arb could be the smart, rule-based approach you’ve been looking for.

PITFALL 1

Overtrading: The Hidden Cost of Hyperactivity 💨

A frequent temptation for investors is to trade too often, driven by the desire to catch every fluctuation in the market. This approach not only piles up transaction fees and higher tax bills but also leads to missed opportunities for long-term growth.

Studies consistently show that the average investor underperforms the broader market due to impulsive decisions, primarily overtrading. Overreacting to short-term market shifts leaves portfolios exposed to the risks of missing out on recoveries or long-term gains.

Where Automation Fits In:
Automated strategies work with preset rules that align with your investment goals, cutting down on impulsive and reactive decisions. By automating rebalancing and trade triggers, your investments stay on course regardless of the daily noise in the market. It’s like having a steady hand guiding you away from short-term distractions.

PITFALL 2

Lack of Diversification: All Eggs in One Basket 🐣

Putting too much faith (and money) into a single stock or sector may feel like a bold move, but the risks are undeniable. A sudden shift in the market or a downturn in a specific industry can wipe out significant portions of your wealth.

Diversification is not just about spreading investments—it’s about building resilience. A well-diversified portfolio provides smoother returns by spreading risk across various asset classes. The benefits of diversification extend beyond just reducing volatility; it also exposes your portfolio to a broader range of opportunities.

Automated portfolios within Surmount employ diversification principles to strategically spread your investments. They’re designed to rebalance as market conditions change, helping you avoid the costly mistakes of putting all your eggs in one basket.

PITFALL 3

Emotional Decision-Making: The Psychological Pitfall 🧠

We’re all human, and our natural instincts often work against us in investing. When markets drop, our gut tells us to sell to avoid losses. When they rally, the temptation is to jump in without a second thought. Both scenarios lead to decisions driven by emotions rather than logic.

The Science Behind It:
Behavioral finance has proven that loss aversion—the psychological tendency to fear losses more than valuing gains—is a powerful bias that leads to poor decisions. A consistent approach to investing is essential, but emotional biases often make it difficult to stay the course.

How Automation Can Steady the Ship:
Automated strategies are designed to stick to logical rules, independent of market sentiment. They act on predetermined criteria, keeping your investments aligned with long-term goals regardless of market turbulence. In essence, automation removes the emotional variable from the equation.

PITFALL 4

Timing the Market: A Risky Guessing Game ⚠️

Predicting market highs and lows is like trying to predict the weather next year—highly uncertain and often inaccurate. Even experts rarely get it right. Attempting to time the market consistently can result in missed gains and unnecessary losses.

Our analysis highlights a critical insight: staying invested is key to long-term success. Data from the past 30 years shows that missing just a small number of the market’s top-performing days can have a drastic impact on your returns. For instance, between February 1, 1994, and January 31, 2024, simply missing the best 30 days of S&P 500 performance dropped the average annual return from 8.0% to just 1.8%—well below the average inflation rate of 2.5% over that same period.

It gets even more stark when you look at missing more days. Missing the top 40 days brought the annual return nearly flat to 0.44%, while missing the top 50 days turned the average return negative at -0.86% per year. This shows that a handful of high-return days accounted for a significant portion of long-term gains, reinforcing the importance of remaining invested during market volatility instead of trying to time the market.

These findings demonstrate how crucial it is to stay the course, avoid knee-jerk reactions, and let long-term strategies do their work. Automated strategies focus on consistency and staying invested. By leveraging tools like dollar-cost averaging, automated systems let you accumulate investments over time, reducing the risk of bad timing. This keeps your strategy grounded, even when the market is chaotic.

PITFALL 5

Information Overload: Navigating the Noise 🌊

Investors today are bombarded with a constant stream of information, from headlines to social media opinions. It’s easy to get overwhelmed and lose sight of your long-term strategy. In many cases, the latest “hot tip” has already been priced into the market by the time it reaches you.

Overreacting to news cycles results in overtrading and derailed portfolios. It’s essential to distinguish between actionable insights and mere distractions.

Automated investing systems filter out the noise by acting solely on data-backed rules and market indicators. This disciplined approach keeps your investments aligned with a clear plan, rather than being swayed by daily news cycles.

RECOMMENDED READING

"The Little Book of Common Sense Investing" by John C. Bogle 📚

If the idea of staying invested and avoiding market-timing pitfalls resonates with you, a must-read is The Little Book of Common Sense Investing by John C. Bogle. In this classic, Bogle, the founder of Vanguard and a pioneer of index investing, presents the fundamental principles of patient and disciplined investing. He emphasizes the importance of holding onto broad-based, low-cost index funds and avoiding the temptation to chase returns or react emotionally to market swings.

One of the key takeaways from Bogle’s book is the power of compounding over the long term and the dangers of trying to time the market. His philosophy aligns perfectly with the findings of our research, which show that missing even a handful of the best-performing days can drastically reduce overall returns. By focusing on the long game and adhering to a strategy grounded in simplicity and patience, investors can navigate market turbulence more effectively and accumulate wealth steadily.

This book is an excellent read for anyone looking to deepen their understanding of long-term investing and gain confidence in sticking to a disciplined strategy through thick and thin.