The S&P 500 Index, the barometer of broad stock market performance in the United States, has generated a return of about 10 percent annually over the last three decades.
So the typical investor must be doing well, right?
Wrong. The average mutual fund investor has earned less than 4 percent annually due to a combination of mutual fund expenses and poor market-timing decisions that lead to buying high and selling low, according to the annual Dalbar Quantitative Analysis of Investor Behavior.
The gap shows the importance of behavioral finance, which combines the realms of economic theory and the psychology behind how people make decisions.
At Elevage Partners, we’re big believers in coaching clients about being patient, long-term investors. We also typically invest using low-cost exchange-traded funds or index funds.
That may not be as exciting as what you read in the financial media about the latest hot stock or when to get into the market or when to get out as warning signs begin to flash red.
As financial author Daniel Crosby put it in a recent interview with Marketwatch: “Despite the unequivocal truth that investor behavior is a better predictor of wealth creation than fund selection or market timing, no one dreams about not panicking, making regular contributions and maintaining a long-term focus.”
We like to stick to our knitting and do all three things. It’s not as easy as it sounds.
Thanks to thousands of years of evolution, humans are hard-wired to panic. People also tend to live in the moment and put off decisions about things that are years or even decades away, like retirement.
This affects the typical investor’s decisions in a couple of ways.
First, investors may panic amid sharp market declines and decide to sell investments. They then jump back into the market only after the coast is clear. The result? The investor gave up market gains by selling into a decline. And they likely limit their gains by coming back to the market when prices are up significantly.
Second, by focusing on the here and now – another evolutionary trait passed down over countless generations – most people don’t save as much as they should for goals like funding college education or retirement.
Our comprehensive financial planning process is designed to short-circuit client instincts. It’s also a big part of coaching clients in proper investor behavior.
As part of planning, we separate client assets into two categories: short term and long term. By making sure that their short-term income and liquidity needs are met, we can then determine how much money can and should be invested to support their long-term goals. This buffer makes it easier to stomach the market’s ups and downs.
We also encourage regular, systematic savings into retirement, college savings, or other accounts that support client goals. By making savings a habit, it helps tame everyone’s focus on today rather than the needs of tomorrow.
*Past performance is not an indicator of future results. This material is not financial advice or an offer to sell any product. The statements contained herein are solely based upon the opinions of Elevage Partners, LLC (“Elevage”). Elevage is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which may be requested by calling (877) 922-8243 or visiting http://www.adviserinfo.sec.gov. The information contained herein is derived from sources we believe to be reliable, but which we have not independently verified. Elevage assumes no responsibility for errors, inaccuracies or omissions in this information. Elevage reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive. It should not be assumed that any of the securities transactions, holdings or sectors discussed were, or will prove to be profitable, or that the investment recommendations or decisions Elevage makes in the future will be profitable or will equal the investment performance of the securities discussed herein.ELV-17-02