PROFIT OVER THE LONG TERM
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” – Peter Lynch
Since the Trump victory my phone has been ringing off the hook from clients who want to know what to do with their portfolios. Some want to know what the “best” sectors are to invest in. Others are panicked. Still others are “worried” because the market reached an all-time high. Just as I sat down to write this column I met a friend outside my office and he asked, “What do you think about the Dow at 19,000”? To which I responded, “It’s a number.”
Underperform
According to the Dalbar’s Quantitative Analysis of Investor Behavior in 2014, the average investor in a blend of equities and fixed-income mutual funds generated a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013. The same average investor hasn’t fared any better over longer time frames. The 20-year annualized return comes in at 2.5%, while the 30-year annualized rate is just 1.9%.
The question is why do investors tend to do so poorly? One major reason is that they let emotions take over. When markets drop and they do regularly, investors panic and sell. They then miss the stock market recovery. All we need to do is rewind back to February of ’16 for a great example. The market had been dropping for approximately 10 months leading up to Feb. Then the losses accelerated and we were in the midst of a 15% market correction. I remember some very nervous investors calling me and wanting to sell out all of their stocks. I tried to reassure them by saying that markets drop but over time they recover and move higher. Most investors were calmed but those that sold, ended up missing out on the recovery. As I called them throughout the summer and fall I received the “I don’t want to do anything until after the election” line. Now that the election has passed I get the “well the market is at an all time high and I’ll wait for it to drop” response. That is exactly why investors tend to underperform the broader market.
It’s important to note that if the stock market tends to go up over time, there is a pretty good chance that it will be trading at an all time high!
Then there are the investors who trade too much. They need to constantly buy and sell. They get an idea and buy the investment. Then they get another idea and sell the first investment and buy the second. They never even let the first idea play out and they are on to the next.
Too smart for your own good
Whether it’s trying to ‘outsmart’ the stock market by trying to find some kind of cute reason that no one has ever thought about, or the fact that individuals tend to panic when the market drops and they sell their stocks and then only buy back once the market has recovered (the opposite of buy low and sell high), there is plenty of research that shows that individuals who try and time the market buy frequent trading, tend to underperform board market indices. The key to making money in the stock market is not by trying to outsmart the market, but by investing with a long-term horizon. Not to overdose on clichés but there is another famous investing saying,” it’s not timing the market, but time in the market” which is the best way to build wealth.
No Shortcuts
There is no magic formula. Slow and steady wins the race. Trying to time the market or outsmart the market is a recipe for failure. The way to profit in the market over the long-term is to stay disciplined. You need to start investing in quality investments, keep depositing more money and with the wonders of compound interest and the growth of the stock market, over time you will create a comfortable nest egg.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates. Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.gpsinvestor.com or email aaron@lighthousecapital.co.il.