Over the last few years, I’ve often ended my blog with the reminder that the best way to achieve growth is to invest for the long term. I believe this because of what history tells us. And, although the numbers are out there for all to see, investing is not that black and white. Perhaps it shouldn’t be this way, but there are many non-financial factors that come into play when people deal with their investments. One of the largest is their emotions. When people make investment decisions based on their emotions, they often make serious missteps. Let’s take a look.
Since 1928, the average annual return of the S&P 500 is 9.5%.* This is a well-established number that holds true for most 20-year periods. Dalbar, a market research company, does an annual study on investor behavior. In their 2015 report, they looked at the thirty year period ending December 31, 2014. During this timeframe, the S&P 500 had an average annual return of 11.06% , however the average equity mutual fund investor saw a return of only 3.79%.** Why the large discrepancy? It all has to do with investor behavior.
The Dalbar research found that underperformance was most acute in months when there was a market shaking event, or what they call a “maximum impact” event. Over the last thirty years, two of the largest market underperformance months happened in 2008: October (when the bailout bill was passed) and September (when Lehman Brothers declared bankruptcy). While the market was dropping, individual mutual fund investors were losing even more. This is caused by the emotional response we have to flee from scary events. It is a totally human response, but possibly not the best investment strategy. Unfortunately, this causes people to invest when it feels good and sell out when it feels bad. When you think about it, it usually feels good when the markets are high, and feels bad when the market have fallen.
Even when markets are not scary, investors tend to not act in their best interest. The Dalbar study found that the average equity mutual fund investor’s holding period was only 4.19 years.** For asset allocation funds the average holding period was 4.78 years.** There are several reasons that may be behind this lack of patience. One is the so-called “action bias.” That is, we often feel it is more important to do something as opposed to doing nothing. Again, a very human bias, but possibly not the best for investing. Another tendency we have is to chase returns. Whether it is the hot stock we hear about from our brother-in-law, or the five star fantastic mutual fund we see on CNBC, we are attracted to shiny things. This, however, can cause us to sell out of a sound investment strategy and/or to buy a security that has already appreciated significantly.
So, what does all this mean? Are we supposed to just buy into the market and hold forever? No, of course not. There are many reasons to re-allocate your portfolio, or to increase or decrease your investment holdings. But, all the good reasons revolve around the investor and not the market. As your life changes, your investment situation may also change. Even just getting older (and closer to accessing your investment funds) may be a cause for re-allocation of your portfolio. But it’s important to have a plan and to use that plan to guide your investment decisions. So, speak with your financial advisor and make sure your plan is on track. And remember, the best way to achieve growth is to invest for the long term.
**Dalbar’s 21st Annual Quantitative Analysis of Investor Behavior 2015 Advisor Edition
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
Check the background of this investment professional on FINRA’s BrokerCheck.
A Financial Advisor registered through CUSO Financial Services, L.P., Gavin has 25 years of experience as an advisor in the Puget Sound area.
“I believe every client is unique and deserving of a personalized financial plan that will help them reach their individual financial goals. Before I make any recommendations, I like to get to know my clients. By asking the right questions, and developing an honest, trusting relationship, I can really get a sense of what’s going to work best for them.”
Gavin graduated from the University of Washington with a BA in Business Administration and started his financial career with US Bank in the Investment Department. Prior to joining Verity in 2006, he spent eight years with Piper Jaffray.
So what is Gavin’s vision for his dream retirement?
“My dream retirement would be absolutely worry free: financially, emotionally, and in every aspect of life. My finances would be in order so expenses for travel, luxuries, and gifts for the kids, grandkids, and great-grandkids would be taken care of. My kids would be financially sound, so I would be confident in their prosperity. This would give me the freedom to travel and play and do whatever it is I want to do.”
When Gavin’s not working, he enjoys spending time with friends and family, watching Husky football and taking weekend trips around the Northwest.
Gavin is registered to transact securities business in the states of AZ, CA, CO, FL, HI, ID, IL, KS, MN, NV, NY, OR, UT, VA and WA.
*Non-deposit investment products and services are offered through CUSO Financial Services, LP (“CUSO Financial”) (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CUSO Financial. Verity Credit Union has contracted with CUSO Financial to make non-deposit investment products and services available to credit union members. Atria Wealth Solutions, Inc. (“Atria”) is not a broker-dealer or Registered Investment Advisor and does not provide advice. CUSO Financial is a subsidiary of Atria.
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