The stock market averages 9 percent returns. The average investor averages just 5 percent. Here’s why.Jay Handy, CEO of Walnut Capital Management and SignalPoint Asset Management
by Jay Handy, CEO of Walnut Capital Management and SignalPoint Asset Management
Here’s an astonishing fact:
Between 1928 and 2014, the average return of the S&P 500 was 10 percent per year. The average returns for investors with money in the market over that same timeframe was just 5.02 percent.*
That’s an incredibly poor average performance given the performance of the market over the same time frame! Why do investors leave so much money on the table?
In one word, emotion. Fear and desire take over the frontal cortex of even the smartest people I know and drive decision making when the market is at an extreme.
When the market is hitting new highs week after week, it’s easy to start checking your 401k two to three times a week while dreaming of an early retirement. It’s at this point in the cycle that people begin to buy more and more stock. And yet, these are the times when people should be selling some of their holdings or, at a minimum, rebalancing to a slightly more conservative portfolio. (When you’ve made a lot of money, it’s better to convert it into a form that will hold its value over time, whether that’s hard cash or shares that historically stay steady over time.)
At the other end of the curve are those times when the market has been decimated, and you should actually be adding to your holdings. (It’s like a clearance sale, in a way. When the price drops, buy!) Instead, the typical behavior in a struggling market cycle is to leave your portfolio statement unopened, tucked into drawer, and clinging to the dream that it will one day all come back. This isn’t actually a bad strategy either, as the stock market historically rebounds after a drop, given enough time. The people who stay in hiding are lucky people. Most people, eventually, will crack and sell out for cash.
In other words, most people in charge of their own mutual funds, driven by powerful emotions and good intentions, buy high and sell low. And by waiting for the market to recover before buying again, people miss the fastest growing days of the market.
Remember this: Over a period of years, it is not about “timing the market” but rather “time in the market.”
Depending on what decade you are looking at, the historical returns of the market can be between 8 to 11 percent. Those numbers are a seductive call to move into the market, but the reality is very few people achieve these returns because they thwart their own success by trying to time the market.
There are two primary things you can do bolster yourself and your finances:
- Brace yourself and commit to buying more when the market drops and leaving your portfolio alone (or rebalancing to a more conservative portfolio) when the stock market soars.
- Work with a financial adviser who can help you make the best decisions given the inevitable dips and swells of the market.
We provide the latter service, of course, and we’d love to work with you to set up a portfolio. Either way, keep educating yourself about finances so that when the market swings, you operate from a place that is logical and informed. We’ll be posting educational material here on a regular basis to help you out.
*Data based on the 2014 DALBAR Qualitative Analysis of Investor Behavior report.