Investing money successfully isn’t easy; if it were, then everybody would be rich! Moreover, there is no Holy Grail, or magic, a risk-free formula that ensures success and worry-free sleep. In short, investing involves some risk-taking, and despite what you may have been led to believe, there is no way to get around it—you can mitigate risk, but you can’t eliminate it.
Fully reduced and simplified, investing is a two-step process:
#1 Invest your money.
#2 Monitor and adjust your investments.
Most people are fairly good at #1, investing their money. Finding an experienced and trustworthy advisor, allocating among different asset classes, diversifying, and balancing position sizes are pretty intuitive processes. Choosing high-quality stocks and bonds and assembling a portfolio is also a relatively straightforward process, and there are many independent and objective sources to help guide investors (like Carnegie).
Unfortunately, most people are very bad at #2, adjusting and managing their portfolios; and it turns out that what you do after you’ve invested your money (i.e. how you behave) is more important to return than the individual portfolio holdings themselves. Why? It comes down to human nature and temperament. In times of stress, investors have a strong tendency to make poor decisions, and the stock market is very good at providing times of stress! So when the market is falling sharply, people bail out at the wrong time (fear) and when the market is soaring, people chase the higher prices (greed).
One thing you can be sure of: the markets will test your resolve. In the 30- year period from 1980-2010, the average annual return of the S&P500 was 9.6%, BUT the average draw-down each year (correction from one point to another) was -14.3%. Take a guess what most investors do during such drawdowns…do they buy? Nope---they sell, and it’s invariably the wrong thing to do. They don’t do this because they’re dumb; they do it because they’re emotional. There have been many studies showing the pernicious effects of this errant behavior on investment returns. For instance, in the decade 1999-2009, the best-performing mutual fund was the GCM Focus Fund, returning 18.2% annually. The typical investor in the fund, however, experienced a return of -11% (according to Morningstar). This alarming difference is mostly attributable to people making their buy/sell decisions based on fear, greed, and raw emotion.
The best way to avoid this behavioral trap: don’t follow the crowd, and to fight your own illusion of control… something much easier said than done. This is when the value-add from an experienced advisor stands out. A firm like ours can help take the emotion out of investing for you by providing objective, calm advice. We help you stick to your plan. We help you keep your head while others are losing theirs.
"Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell." - Warren Buffet
