Study after study shows that the average investor cannot beat the market. You may have heard that “fear and greed” drive the markets. Those investing on emotion risk being fearful at the wrong time and selling at the bottom, or being greedy at the wrong time and buying at the top. See below for a graphical representation of the Cycle of Investor Emotions.
As a result of this “fear and greed” cycle, many investors do far worse than the average market return. Research backs this up. On average, investors without a disciplined process will significantly under-perform the stock market. Consider the chart below from independent research form Dalbar. Over the twenty (20) year period ending December 31, 2010, the S&P 500 Index achieved a 9.14% annualized return, while the Average Equity Fund Investor received a return of only 3.83%. This is known as the “behavior gap.” For the stated time period this is an “emotional penalty” of 5.31%.
This chart shows that, especially with today’s volatile markets, investors working off of emotion rather than from discipline can be their own worst enemy.
Most individuals don’t want to spend the time, nor do they have an interest or the experience, to create and follow a disciplined investment system that is going to give them a reasonable chance of accomplishing their most important goals. Without having and following a disciplined plan, investors jump in and out of the market at the wrong time damaging returns and jeopardizing their retirement goals.
The management of downside risk is critical in today’s volatile markets and should also be a key philosophy deployed on your behalf.
Finally, we recommend your investment strategy be guided by an Investment Policy Statement. Our clients take advantage of institutional funds through DFA which are designed to:
- Tailor your asset allocation to best meet your goals while reflecting your tolerance for risk,
- Minimize taxable income and realized gains when in taxable accounts,
- Minimize the internal expenses of investments and total cost of your strategy,
- Diversify portfolios to avoid the concentrated risk of betting on any one industry, company, or geography, as well as maintaining the proper diversification through selective re-balancing, and
- Use historical models to weight investments to perform the best over time through a disciplined, long-term investment approach.
While no one can guarantee future performance, we believe an investment strategy that is:
- in our mind proven over decades,
- then tailored to your goals, and
- patiently executed will maximize your chances of reaching your investment goals.
Are you ready to create a plan for living the life you’ve always dreamed about? Contact us today to schedule your complimentary discovery meeting.
Your Guide to Financial Independence
Rick Epple, CFP(r)