A recent Dalbar study showed investors, who manage their own portfolios have earned less than 3% annually over the last 20 years. Yet, the market, over this same period has returned nearly 10%. Why? The answer is relatively simple, they do not understand how volatility can be their friend. They don’t know how to structure a portfolio to take advantage of volatility and they pay too much in fees, expenses and taxes.
Let’s look closely at the investor cycle. For many people, it is just that, cyclical. As you can see from the graphic, investor emotions can go up and down depending on market performance. The trick is to match your emotions to your actions.
How many have heard the phrase, “buy high and sell low?” Unfortunately for most investors, that is the result of uncontrolled emotions and reacting wrongly to volatility. We tend to buy on the good news (optimistic, excited, and elated) and sell on the bad news (concerned, nervous and alarmed). When an investor becomes frightened, they can make exactly the wrong decision at the wrong time. This is no way to approach investing, but left alone to make our own investment decision, many investors operate just this way.
Suppose for a moment you liked Tuna and tuna normally was selling for $1 a can. If you saw it at the market for $1.50 a can, would you load up on it or wait for a better price? Most would defer purchasing and wait. But if Tuna were on sale for $.75 a can, you would probably load up on it. This is the discount, value approach to buying consumer goods and services. But for some reason, investors will not apply it to their money. Instead, they buy lots of Tuna at $1.50 a can and refuse to buy at $.75.
Controlling the investment emotions is an important aspect of investment management. When the market goes through a worldwide crash like it did in 2008, it is easy to believe it will never recover. But markets go up and markets go down. They have for a 100 years or longer. It is easy to believe the investment media when they say the end is near. Run for the hills. Take you money off the table. But all of this is written to sell magazines and newspapers. It is exactly the wrong advice. Over the last 90 years of data, the market has compounded at 9.8%, through the ups and downs.
If I were to ask you this question – how would you answer it? “Do you think 10 years from now the stock market as a whole will be higher, lower or the same?” What would you answer? Most would say it will be higher. Then why would you decide to not buy Tuna for $.75 a can? The time to buy stocks is when you have the money. The value of the stock today is not nearly as important as the value 10, 15, 20 years from now.
Investors who can control their emotions and ride out the ups and downs will do much better in the long run that those who see when they read the sky is falling. Be a Tuna investor. Buy value and hold it for the long run. You will like the results.Investments