By: Blake Holman, Investment Officer
The short answer, psychology. The instinct to sell never seems to take hold when the market is surging higher with each passing day, just like the urge to buy when it is in freefall typically ends up sounding something like, “I’ll wait for it to start to turn around and then I’ll go all in”, which is why retail investors have historically sold low, bought high, and received a fraction of the market’s gains over the past decades. Case in point from December 31, 1999 – December 31, 2019, the S&P 500 returned 6% annually, not its best couple of decades, while the average retail investor made only 4.25% per year. That doesn’t sound like a lot of difference, but on a $100,000 investment, the typical retail investor would have ended that 20-year period with about $91,000 LESS than if they had stayed disciplined and stayed invested ($229,890 for the retail investor vs $320,713 for the index performance).
How important is it to stay invested, even in the bad times? Well, if you look at the fifty-year period starting in 1970 and ending in 2020, an investor who missed out on the single best day of market performance would’ve lost 10.38% of their total return. Missed the five best days – lost 35% of their total return. Five days out of 12,650 trading days is the difference between retirement success and still working into your 80s. If we allow our investment decisions to be guided by emotion, our returns will mimic lemmings at a cliff’s edge and meet an unpleasant end. How do we remove emotion from the equation? Hire a professional. Better yet, hire a fiduciary. Fiduciaries are held to a legal and ethical standard of acting in their client’s best interest. Full stop. Many financial advisors and brokerages are subject to the “suitability standard”. What’s the difference? It means that an advisor is not legally required to put the client’s interest ahead of their own, and when a conflict arises, an advisor can act in their own best interest first. But returns aren’t just about staying invested, they’re about limiting expenses which, like ticks on a hound, will drain your returns over time. Be mindful of commissions, expense ratios, and management fees. Always inquire about the real cost of having a professional manage your money. Ask those questions and compare the cost of one professional vs another, while also comparing their performance. Make sure the math makes sense. If you’re going to stay invested, it’s good to know that you’re invested with somebody who’s invested in you.