Dave Kennon, Kennon Financial
In last week’s article, I cited a truly amazing study. Dalbar Inc., for the past 24 years has been tracking portfolio returns.
1. First, they looked at what the stock market returned.
2. Then they looked at what actual human investors made investing in the stock market.
Are you ready for their findings?
1. The stock market (S&P 500) had an average annual return of over 10% during that time period.
2. Human investor’s average return? 4%
How is this possible?
Very simply, humans are emotional. Humans and emotions are a bad combination when it comes to successful investing.
I hear it every week in my office. “Dave, I lost a ton of money in 2008. I can’t let that happen again. I’m retired now and if I lose all my money I have a BIG problem.”
While I empathize with their discomfort, I can’t help but think to myself, “Your brain is exaggerating the losses and forgetting the gains.”
What do I mean, exactly? Let’s take a look at stock market returns over the past ten years. (source)
Here is a statement I rarely hear: “Dave, minus a couple bad years, I have made a ton of money by sticking with a plan and staying the course.”
This phenomenon is known to the psychological community as “negativity bias.” Very simply, human beings are hard-wired to focus on the negative and dismiss the positive.
Imagine living in a cave 10,000 years ago. Tigers are trying to eat you, neighboring tribes are trying to kill you, and danger lurks around every corner. If you don’t focus on the dangers, you die.
I have not had a single client eaten by a tiger. Or a bear for that matter.
This same programming today could sabotage your retirement, and, in particular, your finances. If all you do is remember the negative, you forget the overall big picture.
All of this goes back to Baby Boomers’ rather skewed perspective on the stock market. You are being asked to trust a financial instrument that, by its very nature, is volatile and unpredictable. Of course, it might stress you out.
So what is the solution to this dilemma? You. Have. To. Stay. The. Course.
I know. It goes against your instincts and “gut-feelings.” It goes against all kinds of stuff you hear in the news. But you have to fight back. You have to trust in the process, knowing that you have decades of economic history to back up your decisions.
Just to review:
1. The markets are never “due” for a crash.
2. One certain month does not have better historical returns than another. (source)
3. Elections have zero long-term bearings on the stock market. (source)
4. Waiting for the market to go down before you invest doesn’t work. At all.
5. Nobody has ever been able to consistently time the markets. Ever.
I have an extremely rewarded job. As an objective, third-party advisor, I am able to help my clients navigate the ups and downs of the economy. But if I could give everyone who is reading this article a piece of advice:
Stop thinking about your investments. Turn off the financial news. Put a plan in place and don’t deviate from it. I know you can do it!
Hopefully each week I am able to help put your mind at ease and stop you from making emotional decisions when it feels like the tiger is about to pounce.