Three of my favorite quotes with timeless insight for investing in volatile markets are:
1. “The most important quality for an investor is temperament, not intellect.” –Warren Buffett
2. “The four most dangerous words in investing: ‘This time it’s different.’” –Sir John Templeton
3. “In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility.” –Benjamin Graham
Unfortunately, average investors do not take these quotes to heart. The news media pounces on any negative news and social media exacerbates the reports. We certainly have seen this in the last few months as equity markets have sold off from their highs.
The recipe of fear and emotion may ultimately cause investors with well-balanced portfolios to make the worst financial mistake of their lives. These types of mistakes consistently lead to lower annual returns. In fact, a recent study done by DALBAR Inc., a company which studies customer performance based on investor behavior, shows that the average investor earns less than average returns based on this type of behavior.
For example, in the last two decades ending Dec. 31, 2015, the S&P 500 Index averaged an annual return of 9.85 percent, while the average equity fund investor earned only 5.19 percent. While that may not seem like much of a difference, let’s translate this into real dollars.
Say you’re 45 years old and have $200,000 invested, save $10,000 per year and plan on retiring in 20 years. At age 65, the portfolio would be worth $1,872,360 based on a return of 9.85 percent. If we use the 5.19 percent figure, the same portfolio would be worth $887,576, which is a difference of nearly $1 million.
So why do average investors continue to underperform? Two reasons:
1. We live in a do-it-yourself world, and the internet is a complete database of how to build or repair just about anything. Don’t believe me? Think of your to-do list at home. There is probably a YouTube video with clear instructions on every one of your projects. Why does this matter? Because average investors think they can build or repair their saving and retirement portfolios using the same database. Unfortunately, no matter how great of advice the internet provides, fear and emotion will continue to get in the way.
2. Average investors have a hard time creating and sticking to a plan and ultimately give up. This sounds just like New Year’s resolutions goals, doesn’t it? According to Statista, a statistics portal, the No. 1 resolution for 2018 was to save more money. Unfortunately, more than 92 percent of resolutions fail by February. Having a trusted and reliable source to hold you accountable decreases the failure rate significantly.
Working with a trusted financial adviser can help guide you through difficult situations and market volatility in order to minimize or eliminate emotional investment decisions, as well as ensure you stay on course and remain accountable for achieving your financial goals.
Ryan Diepstra is a principal and senior vice president at Centennial Securities. He can be reached at firstname.lastname@example.org or (616) 942-7680.