The Raw Data
Every year, Dalbar releases their most up-to-date investor behavior analysis. And what do they find every year? That no matter what the market does, the return on your investments are more dependent on your behavior as an investor than how the individual funds perform.
Take a look at the numbers from the 5-year period from 2011-2015:
|Year||S&P 500||Average Equity Fund Investor||Difference|
Source: Dalbar’s 22nd Annual Quantitative Analysis of Investor Behavior
Dalbar’s data is consistent over the years. It takes into account all market conditions and always comes up with the same results: investors’ returns are always less than true market performance. Through the past 30 years, equity fund investors earned an average of 3.7% annually while the S&P 500 earned 10.4%. That difference can make or break your investments. Let’s look at some reasons why this happens and what can you do about it.
Short-Sightedness Vs. Long-Term Perspective
The markets fluctuate every day. You’ll only feel more stressed and make emotional decisions if you monitor your performance and adjust your investments every time something unexpected happens. It’s more important to maintain a long-term perspective and a disciplined approach.
Stay true to your investment strategy hold tight when the markets go crazy. As the saying goes, you need to learn to see the forest through the trees. You need to learn to look past the short-term ups and downs and keep your eyes on the big picture in order to stick with it through the bad days and not miss out on the best days.
The following graph from CNN Money shows the “trees,” the short-term market fluctuations, which are why so many people leave the stock market in a panic and miss out on the best days. This is the S&P 500 from a 6-month period in 2015. There are a lot of ups and downs, and even some terrifying drops.
A wise investor needs to learn to ignore the “trees” and keep their eyes on the “forest,” the historic market returns. The following graph shows the same S&P 500 over the last 115 years, rather than 6 months. It is much more reassuring. The continual upward trend is tangible proof of the strength and dependability (and also short-term volatility) of the markets. Keeping this picture in your mind regardless of the daily headlines will give you peace and confidence when facing the month-to-month ups and downs. You have over 100 years of history on your side.
Ignoring The Fine Print
It’s basic math — gross return less costs equals net return. Investments with high costs and/or hidden fees can drastically eat away at your assets over the long-term. An investor will not receive the full return that the market provides due to fees and management costs, but investing in cost-effective investments will provide you with an opportunity to get a larger portion of that return.
Panic Selling Vs. Rebalancing
Instead of going on a buying or selling frenzy when the market roller coaster gets wild, take a deep breath and rebalance your portfolio annually. When the markets get overly out of whack, your asset allocation has also probably gotten a little off. The high returns that portions of your portfolio are generating are shifting your portfolio off balance, with some investments growing much faster than others.
Though it may seem counterintuitive to sell off your winners, rebalancing is a wise and proven investment strategy. You need to rebalance your portfolio by selling some of your overachievers to purchase underperformers. This will keep your portfolio from having more risk than you are comfortable with. What was once only 10% of your portfolio can potentially grow to 20% or 30% in a bull market. Readjustments may be necessary.
The Performance Measurement That Matters Most
When it comes to investing, what matters most is not market performance or this year’s hot stock picks; it’s applying the right behaviors to a personalized strategy based on your specific goals and needs.
By using a disciplined approach, focusing on the long-term, and working with an unbiased advisor who understands investor behavior, you can work toward your goals and a successful retirement. Contact your Trilogy Advisor today for help!