If you speak with someone about the market or how their portfolio is performing, they will often bring up the returns of a sector, stock or fund that they recently saw mentioned in news headlines or some other media outlet. They may also talk about a holding or idea that a friend, neighbor or colleague brought up during conversation. Inevitably they will in some way often refer to what is known as investment return. Although this shows they try to stay informed and position themselves well, ultimately reaching their financial goals will not depend on investment return, but will depend on the results of their individual portfolio, their investor return.
Fund flow research shows that although US stocks have returned over 10% per year since the late 1980s (investment return), the average investor’s portfolio has returned below 3% per year (investor return). This data shows the drastic contrast between media and sales-based headlines and the actual results within investor accounts. The difference between the performance of each asset class in the chart on the right and investor portfolios is driven by poor investor behavior and panic as individuals give in to the temptation to time the market, and sell near market lows during periods of volatility and buy near market highs.
Although staying diversified and fully invested over the long-term may sound straightforward, it is as tough as ever in this age of interconnected devices and the constant news cycle. Individuals are flooded with headline alerts and notifications on their phones, TVs, email, tablets and watches. News and alerts regarding the financial markets are more often than not written by journalists posing as analysts and are geared to drive fear and clicks, not help individuals make informed decisions. Authors of these articles often do not have formal financial training and have no experience advising clients in the real world.
The chart above shows the importance of partnering with an advisor to help you remain fully invested and stay the course over the long-term. This data also shows us the idea of staying in the market may be simple, but is not easy. Along with helping you map out and pursue your financial goals, the compensation you pay your advisor can also be viewed as type of insurance premium against poor investor behavior and trying to time the market. This can be referred to as your advisor premium.
Market fluctuations and headlines will drive emotions and cause investors to act irrationally. While it is common for investors to want to move their assets to cash, it is also important to acknowledge it is not natural to stay invested. The next time you see an alert or news headline regarding market volatility and think you need to act, think of the chart above and know that by staying the course, you are showing above average behavior and will likely be outperforming the average investor. Remember, volatility does not equal loss unless you sell.