Investing is not for the faint of heart

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Today, I am going to let you in on one of the best kept secrets in investing. Here it is - investing isn't supposed to feel good.

Sure, you desperately want it to feel good. You see commercials telling you that if you're a good little investor, everything is going to be sandy beaches and sunshine, and you want to believe it. But the reality is that markets cycle between bear and bull, react to the latest crisis (whatever it may be), and are affected by the global economy; in other words, markets can be emotionally brutal. What makes investing so challenging, is that we are human. When something feels bad, we are hardwired to react, but doing so can have costly repercussions.

September of 2008 was chock-full of economic turmoil, including the Lehman Brothers bankruptcy filing. For many investors, the temptation to either substantially reduce or liquidate their equity holdings and sit on the sidelines proved to be too great to resist. Not surprisingly, the stock market experienced record outflows in October of 2008, which continued through the end of the first quarter of 2009.

This emotional reaction caused many investors to sell at a significant loss. Moreover, because they did not to get back in or they got back in at substantially higher prices, they missed the 16% market rally that occurred from October 2008 to June 2010.

The urge to get out of our investments isn't limited to the most recent financial crisis. From 1981 to 2010, the return of the S & P 500 was 9.14%. Yet according to DALBAR's 2011 Quantitative Analysis of Investor Behavior (QAIB), the average equity investor's return was only 3.83%. The gap in performance was created because investors cannot control the urge to abandon their investment strategy when they are faced with bad news.

The QAIB states , "One of the most startling and ongoing facts is that at no point in time have average investors remained invested for sufficiently long enough periods to derive the benefits of a long-term investment strategy. " In fact, the retention rate of the average equity mutual fund is only 3.27 years. So while we know the stock market goes up over the long run, the unfortunate truth is that you're not staying invested long enough to reap the benefit.

Panicking out of the market is just a variation of market timing. We've addressed the truth about marketing timing numerous times and our point of view never changes. It's possible to get the occasional market call right, but it's impossible to do it with consistency for any length of time. When fear drives you out of the market, you're saying that you 100% believe that the market will not recover within your lifetime. I hope you can appreciate how ridiculous this is. First, none of us know how long we will be on this earth. But assuming you have at least a few more years left in you, the cyclical, mean-reverting nature of the market means there is an extremely high chance you will indeed see the market recover.

When you're tempted to cash out, ask yourself this question - when you chose your investment strategy, did it match your investment objectives, time horizon, and risk tolerance? If so, and those things haven't changed, why would you consider abandoning it? You cannot let a financial crisis, bear market, or increased volatility dictate your investing objectives or outcomes - and when you flee from the market, that's exactly what you are allowing to happen.

As we mature, we develop our ability to appropriately react to bad news. We learn to put the urge to be short-sighted aside and focus on the big picture. The key is to apply the same skills you use to successfully manage your personal and professional lives to your investments.

When it comes to your money, it's easy to feel a little crazy. The past three years have tested the mettle of even the most experienced investors. Investing is serious business. It is not always going to feel good - and that reality should no longer be kept a secret.

The intent of this article is to help expand your financial education. Although the information included may be relevant to your particular situation, it is not meant to be personalized advice. When it comes to investing, insurance and financial planning, it is important to speak to a professional and get advice that is tailored to your unique, individual situation. All investments involve risk including possible loss of principal. Investment objectives, risks and other information are contained in the Snider Investment Method Owner's Manual; read and consider them carefully before investing. More information can be found on our website or by calling 1-888-6SNIDER. Past performance is not indicative of future results.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Retirement

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