By now you’ve no doubt heard all about the latest dreadful returns from our nation’s stock market. The first five months of 2013 have been historically galling for most American investors. Wait, what? Am I talking about the same roaring stock market you’re talking about? Yes! And, no.
Yes, clearly the U.S. Equity market has exhibited one of its vintage thoroughbred rallies this year. But no, sadly, it turns out the average American saver largely missed it. How can this be?
Now, throughout this banner season for equities, the largest holding in the majority of Americans’ overall asset allocation has been Cash—which is earning zero. Now lest one dismiss this truth as some other generation’s problem, to be clear: this misbegotten tail-chasing ‘bet on cash’ situation pervades across ALL age groups, right through Generation Y.
It’s like we’re our own worst enemy, because when it comes to investing, most of us are.
The problem is that savers tend to move in backward-looking, frightened herds. Which is wise…if you’re the prey.
But we invest not for short-term survival. We invest to advance long-term purchasing power.
Relax, it’s not life, just money. Money you’re not even using. That and, though it takes awhile to adjust, as a species we haven’t been hunted by predators in some time. (Pray that multi-millennial ‘food chain’ rally knows no end.)
When it comes to our money, we largely still don’t get it. It’s why even Warren Buffett and Bill Gates get advice. If investors were a baseball team, they would position all eight of their fielders in the spot where the previous opposing batter’s hit had landed in preparation for the new batter at the plate. Helps to explain why an Institutional fund investor captures 90%+ of the upside in a given mutual fund, while the Retail investor deprives himself via bad behavior of fully 75% of all the long-term gains suffered in the very same mutual fund.
In spite of the adage, the average investor left to his own devices will systematically buy high and sell low every time. And why? Foremost among them, we fear present losses many, many times worse than we covet future gains. This asymmetrical analytically unsound ‘loss aversion’ leads to frenzied investor behavior, which rarely works out well. Ergo, this glorious pan-rally is the worst news in awhile, for those damaged capitalist souls who needed the help the most.
Meanwhile the S&P 500 inconspicuously peels past the thousands like a freight train. Forceful, if not fast. It’s working out great for the professionals, and those who stuck to good advice, those who stuck to their plans, timetables, discipline, and personalized their benchmarks. They never left, and as you have probably observed, historically the majority of the market’s best days/quarters strike closely behind the worst. Miss those best 10 or 20 days, and you forgo a significant chunk of your long-term returns.
Fortunately, with each passing day, more and more investors succumb to longer-term logic and get back with the program—their program. Which is a good thing, as long as you orient your benchmarks around your tested personal risk tolerance and remember your time frames. Then, most important of all, stick to your plan.