Don’t be an investment schmuck.
One of the goals of GregryBresiger.com is to help people achieve investment goals that will enrich them and allow them to help others.
The problem is so many average investors follow no disciplined plan. They jump in and out of investments based on the latest headlines or the latest get rich investment programs on the tube. The average investor can’t stick to a plan in good times and bad. He or she becomes too enthusiastic in good times and too pessimistic in bad times, instead of following a steady philosophy.
Consequently, the “average” investor rarely succeeds. Let us say it plainly. This person is often a schmuck.
Are You Throwing Away Your Investments?
His or her’s indecision costs him or her thousands of dollars a year, a new study says. And that could prevent the investor from attaining long term goals.
The average individual investor, who tends to buy high and sell low, made mistakes throughout 2018, according to Dalbar’s latest annual “Quantitative Analysis of Investor Behavior.”
The market was down last year. The S&P 500 lost some 4.38 percent. However, the average investor was down some 9.42 percent, the study said, a difference of 4.04 percent. Dalbar also found that over a thirty-year period at its worst—the average investor gets almost six percent a year less.
Getting Blown Away
This everyman investor is “blown away by market turmoil” and in 2018 bad decisions were made throughout the year, the study said.
In October, the market lost 6.84 percent while the average investor lost 7.97 percent. However, August was a good month. The S&P was up 3.26 percent but the average investor only gained 1.80 percent, a difference of 146 basis points.
One basis point is 0.01%. A hundred equals one percent. Over the long term, basis point under-performance makes a big difference.
That could mean a lot in lost dollars.
Hundreds of Thousands of Dollars Lost
If you think I am exaggerating you are wrong. Over the long term it can make a world of difference in how you live your live and whether you will have the ability to help others.
Say one investor isn’t a schumuck. He or she gets eight percent a year. But the other only gets four percent, or four hundred basis points less. They each invest $200 a month over forty years.
Obviously, the eight percent investor ends up with more but how much?
Almost 200 percent more—some $702,856 vs. $237,100, or some $463,000 more.
Do you think almost a half million dollars can make a difference in a person’s life?
“It’s mind boggling what compounding and a few basis points difference can make in the long term,” said Cory Clark, the Dalbar report’s co-author.
“It’s the difference between meeting your goal and not meeting it,” he adds. “It’s the difference between retiring now and having to retire five years from now.”
Dalbar, which has been tracking investors for decades, said the average investor can’t decide whether to get in or out of the market. So the investor buys or sells at inopportune times.
“Judging by the cash flows we saw, investors sensed danger in the markets and decreased their exposure but not nearly enough to prevent serious losses,” the report said.
Advisers say average investors obtain poor returns because they try to “time” the market. It is a strategy, they say, that fails because markets tend to rise or fall in short, often unpredictable, periods.
How not to Be a Schmuck
Most investors, a Long Island advisor cautions, shouldn’t try to anticipate them, but stick to a consistent plan.
“Many of these investors just shouldn’t be in the stock market in the first place,” says Ronald Roge in Bohemia, New York.
Before investing in stocks, he adds, average investors should have a cash reserve as a protection for bad times.
“They should also invest in bonds as well as stocks so they are not so vulnerable when the stock market declines,” Roge says. “They should also know, before investing, how much risk they can stand.”
Roge also says that by having significant assets in other things besides stocks, people will be able to bear the bad times in the stock market. They will get to survive bad times without panicking and jumping in and out of investments.
An Effective Plan
The basic problem of people without a plan, say many investment pros is that it well be nay impossible to time the market. Markets tend to move up and time very quickly in the short term, and in unpredictable bursts. An example is December. That’s when the stock market seemed on the verge of a major crash, yet, just a few months later, it was booming again. Those who sold out in December were, a few months later, feeling like schmucks.
Frequently jumping in and out of markets is also expensive. Remember every time you buy or sell a security, you are incurring a brokerage expense. All these charges add up.
These additional costs hurt performance. In the end, the lack of a plan kills your ability to achieve goals. But having a disciplined plan over the long term tends to improve performance and do something else important: It prevents you from becoming the average investor. You don’t become an investment schmuck.