The Most Shocking Investment Number
There are a number of surprising pieces of data in the investment universe. But there is one that is both shocking and scary. Between 1995 and 2014 the S&P 500 rose about 7.8% per year. Bonds were up about 6% annually over that same period. So how do you think the average investor did? Investors will have both stocks and bonds but also some cash, as they usually can’t be fully invested. So what do you think? 5%? 7%? Well here is the shocking number. Over that period, the average investor made just 2.5% a year, much less than they would have made in a bank CD, and basically just keeping pace with inflation, (i.e. they had a inflation adjusted return of zero).
It’s almost unbelievable. Yes there were two nasty bear markets during the period. But there were two huge bull markets as well. How is that possible? The answer of course is human behavior. We are wired to buy high, sell low. We get euphoric and want to invest heavily when our neighbors are bragging about their investment returns. And we run for the hills when everything looks gloomy. Of course, that is exactly the opposite of what we need to do. As Warren Buffet has said “Be fearful when others are greedy and greedy when others are fearful”. That’s it right on the nose. In my entire career as investment advisor, I have had exactly one time when a client called during a major downturn and said “Let’s get more aggressive”. It’s human nature to be afraid when bad things are happening and to be greedy when goods things are.
So what can we do? How do we push that 2.5% higher? Well first, recognize that no one can time the investment markets. And definitely your stomach can’t. How you feel about the economy, your investments, etc. have no bearing on how they will perform. Here are a few ways you can combat that greed and fear.
- Buy and hold. Pay no attention to the ups and downs of the market. If you’re talking about money you are investing for 20 or 30 years, those ups and downs will average out.
- Hire someone to do the worrying for you. Whether that’s an investment advisor, a broker, a wealth manager, etc. Find someone who can help talk you down from the ledge when it gets bad, and restrain you when you want to mortgage the house to buy more stock.
- Get family and friends involved in the process so you can make more rational decisions. A group can usually be more level headed than we can on our own.
That 2.5% number is a very bad number. It destroys your retirement, makes paying for the kids college almost impossible, adds stress to you life. We need to invest our savings, but we need to do it in a rational way, or that shocking 2.5% will be our ’reward’.