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
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
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
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.