How to Invest Better Than the Crowd

Everyone wants to earn the returns they need from their investment portfolios to meet their financial goals. But if you have a competitive streak, the obvious way to measure your success is by seeing how you compare against other investors. If you can post consistent above-average performance, then you'll be well on your way to reaching or exceeding your goals more quickly than many of your peers.

In order to see how you're doing against other investors, you first have to know what other investors are doing. Giving you that information is the idea behind a new tool from TD AMERITRADE  (NYSE: AMTD  ) that tracks a huge base of investors to give you general trends that you can assess and compare with your own investing results.

Tracking investor movement
For years, investing experts have used overall investor sentiment data as a way of predicting future moves in the stock market. Many of those experts see sentiment as a contrary indicator, viewing the average investor as part of a herd whose inexperience and emotional mistakes smarter investors can take advantage of to produce bigger profits of their own. Yet with investor sentiment data, you have to rely on what people say rather than on the actions that they're taking with their money. In other words, investor sentiment figures assume that people put their money where their mouths are.

TD AMERITRADE's new Investor Movement Index doesn't have to make that assumption. By tracking actual money movements among 6 million accounts at TD AMERITRADE, the index gives you a sense of whether investors are actually bullish enough to commit more of their investment capital to stocks.

What the numbers say
Along with the launch, TD AMERITRADE revealed about three years' worth of very interesting data. Generally over the past three years, the market has been moving up, but it's had plenty of corrections along the way. Over that period, investor money movement has generally acted as a lagging indicator of stock market returns, meaning that investors are reactive rather than proactive in taking advantage of bull markets.

In particular, during sharp advances, investors slowly increase the amount of money they have in stocks. Yet when markets flatten out of decline, they reduce their commitment to the stock market, waiting instead for a new rally to start before getting excited about stocks again. As a result, right now, investors still haven't fully gotten to peak levels in terms of moving money into stocks, despite the fact that the S&P 500 is at a five-year high and that several broad market measures have hit record highs in the past month.

A look at TD AMERITRADE's individual stock information reveals similar trends. Take these examples:

  • Facebook (NASDAQ: FB  ) spent much of the fall plumbing new lows as concerns about the overhang of locked-up IPO shares and the impact of the November lockup expiration weighed on sentiment. But when that expiration didn't go badly, shares soared -- yet the investors who were net buyers of Facebook in December had already missed out on the rise from below $20 to $27 or so.
  • Apple (NASDAQ: AAPL  ) has been a core holding of TD AMERITRADE accounts for a long time, despite losing more than a quarter of its value from its September highs. Many investors who bought near the top are unwilling to consider that the negative concerns that analysts have about the stock's competitive advantage could be valid.

Yet not all of the moves investors make seem fear-driven. According to TD AMERITRADE, investors in financial stocks have taken profits, as have investors in Ford (NYSE: F  ) and Pfizer (NYSE: PFE  ) , both of which saw extensive gains during 2012. Some could argue that the further gains that Pfizer and Ford have experienced in January, based on enthusiasm about Pfizer's pipeline of drug candidates and Ford's doubling of its dividend, point to retail investors' counterproductive behavior. But at least they waited to sell until they'd collected strong gains for the year.

See what works
The Investor Movement Index hasn't been out long enough for anyone to have come up with well-reasoned strategies to take advantage of it. But since the stock market is merely the sum of individual investors, knowing what those individuals are doing should let you assess whether they're succeeding or failing in their investing -- and therefore whether you should stick with the crowd or go your own way.

Motley Fool co-founder David Gardner's strategies have worked for investors for years, as David's picks of revolutionary stocks with disruptive potential have crushed the market. Get his latest insight in a personal tour of his Supernova service, available for a very limited time by clicking here.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.


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  • Report this Comment On January 14, 2013, at 11:05 AM, pondee619 wrote:

    "...during sharp advances, investors slowly increase the amount of money they have in stocks."

    Is this "increase the amount of money they have in stocks" over and above that which would be attributable to the appreciation gained during the "sharp advances"? Is the " increase the amount of money they have in stocks" greater than the market advance during the "sharp increase"? How is this factored/shown?

  • Report this Comment On January 14, 2013, at 5:40 PM, TMFGalagan wrote:

    @pondee619 - By my understanding of how the index works, the answer is yes, the increase is in inflows, not just the value of the existing portfolios.

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