If you have been watching the markets at all this year, you know it has been a rocky start to 2016. As I write this the S&P 500 Index is down 5.91%, and the MSCI ACWI ex US Index is down 6.29% (an International Stock Index). While there are several ideas I could write about, I thought I would talk about what troubles me as a financial advisor, and it is not the markets.
It is an inevitable fact that markets correct. They go down, and sometimes they even crash. It’s an inescapable fact of investing. And sometimes they go that way for a long time. I recall earlier in my career enduring the market decline of 2000-2002. It was three agonizing years of poor performance. And during that time many investors made emotional decisions that were, in retrospect, perhaps a mistake.
So much of the failure of investors lies in their inability to endure market declines, and trust or understand the markets. The markets themselves are usually never the problem- the problem is a reaction to them. If we look at the historical returns of owning equities, volatile as they are from year to year, they have been a great long term hedge against inflation. So many people do not understand what they own when they own stocks, or equities. When you own stocks, whether individually or in a fund, you own the very companies that make everything we see before us in the world. From homes, to planes, to the truck that hauls away your garbage- companies that produce the goods and services that society needs. So, for the market to really truly decline perpetually, it would mean the total decline of our economic system, as all companies slowly become worthless. That is the sole scenario where investors, and everyone, loses.
So many investors encounter a period of market decline and volatility, and because the returns are not immediate they “give up” on sound investment strategies. Make no mistake, there is no get rich quick method to investing. More often than not, if it seems to good to be true, it is. Think about it; if a certain investment firm really had it all figured out as their product advertises, why would they need your money? What really makes my heart ache for investors, is that their failure is so preventable, and yet predictable. The process goes like this. Investor invests, markets perform poorly, the impatient investor abandons their plan, and the markets rebound and the investor misses that rebound. The investor’s new plan is a loser. So they abandon plan b, and again go in search of the silver bullet of investing. They go from strategy to strategy, and will likely earn about 3-4% per year, according to DALBAR’s annual QAIB Study. That is the vicious cycle that all investors must escape to be a successful investor. Only disciplined, educated, and steadfast investors truly earn “market” rates of return.
If investors were really educated, and understood what disciplined investing looked like, they could avoid the vast majority of issues. That is why education is so important. Please join us this year for our investor education series courses, to become a more disciplined and educated investor.