In a world with information overload, it is easy to get caught up in Wall Street’s obsession with outsmarting markets. However, historical perspective and data have provided a different narrative. The number one predictor of investment success is investor behavior during uncertain times. It’s not stock picking, marking timing, or technical analysis. Instead, it is the act of learning to manage your behavior that has the highest impact on whether you will be successful long term. For further evidence, let’s dive into the data.
In 2017, a financial media company, MarketWatch, completed a study that found that over the previous 30 years, the average American had an annual investment return of 3.98%. Over that same period, the US Equity benchmarks had an annual return of over 10%. Why do Americans underperform so significantly?
The most widely accepted theory has to do with behavioral mishaps. In most fields, such as medicine, engineering, or even athletics, when a driven person meets an obstacle, the solution is typically to get more involved and work harder to diagnose the problem and solve the issues. Investing works the opposite way; the most challenging thing to do is not overcomplicate the process. Instead, the most successful investors avoid market timing and big bets which allows capitalism to grow their investments over the long term, as markets inevitably trend upward (regardless of short-term pullbacks).
In March of 2020, the market experienced the swiftest significant drop of all time. Most investors ran for the hills, but the wisest investors found their spare cash and bought as much equity as possible. As of last week, in September 2021, equities purchased at that time were around double their original value. The media presents red days as alarming – instead, it is best to view them as opportunities. Unless an individual company experienced a significant change in structure or business disruption, the ideal perspective is that the stock is on sale from its price the day before.
The current media headlines are tracking the chatter about real estate defaults of a Chinese company, the national debt ceiling, and other general topics that add to investment uncertainty. While these are relevant events with real implications, they aren’t very different from the laundry list of events we’ve seen over recent decades where the market has boomed nonetheless. So remember to view temporary pullbacks as prime opportunities in your long-term investing career.
Legacy Financial Group is built to enhance your investing experience in a variety of ways. We aim to capture the returns the market offers and then augment returns through optimal tax planning, account management, cash flow analysis, estate planning, tax-loss harvesting, and other complex financial concepts.
However, our most valuable service is guidance. Each service listed above improves an already good situation but allowing hysteria in bear markets can completely derail a financial plan. When we experience volatile markets, it is essential to be an investor, not a speculator. It is understandable to feel mixed emotions in rocky times, but it can be ruinous to act on these emotions. If we at Legacy could only communicate one thing, it would be this: Don’t panic, stick to the plan.
Lastly, remember to look on the bright side! Most investments are coming off trading at all-time highs. Through 2021, we have seen equity return 15% or more. People occasionally interpret this as an indication that stocks are overvalued. However, the market hits all-time highs on roughly 7.5% of trading days – equivalent to about 1 in every 13 days that the market is open. Don’t be surprised to see even higher highs in the future.
Our team is here to guide and encourage you through this journey.