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Gifts from the Market

With three young kids in our house, Christmas morning is chaotic, to say the least. Each year, it seems my children set new personal speed records on gift-opening. Despite the pace, once all the wrapping paper settles, no gift is ever left unopened.

I wish I could say the same for stock market participants. Too often, I see investors fail to capture available market returns that could have been theirs, had they simply bought and held sensible, low-cost market-tracking funds to complement their personal financial goals. This leaves me feeling as if they've been given beautiful presents from the markets, but left them unopened.

How many "gifts" may be going to waste? According to this JP Morgan Asset Management analysis, the average annualized investor returns were +2.1% during the 20-year time-frame, 1996–2015.

During that same time, the S&P 500 Index returned an annualized +8.2%. Now, not everyone's ideal returns can or should be compared to the S&P 500. But as a rough gauge, it suggests that there may be a significant gap between average investors available versus captured returns. This could have serious implications, especially for those who are still in the accumulation phase of their lives, hoping to build enough wealth to maintain their lifestyle during potentially multiple decades of retirement.

You may ask: What can cause investors to lag the markets by so much? Here are a few examples that I have seen over the years.index.php

  • March 2009 – Hitting bottom: "I can't take it anymore, I've watched my investments lose more than half their value. I've got to sell, to stop the bleeding."
  • 2010–2011 – Paralyzed by pessimism: "I know the markets have recovered some, but who knows if it's going to last. There's bad news in Europe. There's U.S. debt. Pundits are shaking their heads. I'm going to stay in cash, just in case."
  • 2012 – Paralyzed by skepticism: "With the election coming, plus this fiscal cliff thing, there are still no clear signals that stocks are going to continue to offer strong returns. I'll hold off and see if things settle down."
  • 2013–2015 – Paralyzed by indecision: "We've come a long way. I wish I had gotten back in sooner! I've made some money back, but is there any room for more growth? Maybe I should lock in the gains I've made, before it's too late."
  • 2016 – Fear of Heights and Chasing Past Performance: "This election is too crazy for me. Plus the Dow is almost 20,000. That seems dangerously high. Maybe I should load up on real estate. I hear it's been hot lately."

Whew. Tired of getting dizzy from all the indecision? Before you invest, first create an investment strategy to guide the way … and then stick with it through the crazy highs, the sickening lows and everything in between.

That's a great first step, but you still may feel uncomfortable when the going gets rough and you're not sure what lies ahead. I've got two tips to help with that:

  1. Don't go it alone. Because investors are often their own worst enemies, it helps to have a good coach to remind you why you built your unique investment strategy to begin with, and to help you objectively assess the doubts you're likely to experience along the way.
  2. Ground your strategy in understanding instead of in wagering. Even with a coach, you don't want to invest on blind faith or treat the markets like they're gambling casinos. To invest according to how efficient markets have delivered their "gifts" to patient, long-term investors, it helps to understand the available evidence.

For enhanced understanding, check out this video from our friends at Dimensional Fund Advisors: "The Power of Markets." It does a great job of explaining how you can put the markets to work for you.

Need to know more? Give us a call.We are a fee-only, independent registered investment advisor.