Investment Consultant, Gary Goldberg Financial Services
Nobel Laureate Eugene Fama, acclaimed economist stated, “Money is like soap, the more you handle it the less you will have.” This statement was made to clearly illustrate that investor’s intuition and actions often prove counter-productive. The same point has also been made by legendary investors from Warren Buffet and Peter Lynch to Mario Gabelli. A significant gap has been clearly shown through numerous academic studies between the return of an investment, for example a mutual fund or ETF, compared to the return an investor achieves. The origin of the problem is our emotions, reactions and behavior that cause under performance.
So, here we go again. Investor’s emotions are likely running high as the crisis in Ukraine progresses and markets around the world react to the related geopolitical threats. With emotions running high, so are the risks of making costly “market timing” mistakes. Although all of this may seem obvious, the majority of us still have a tendency to react or even overreact to the media reports of market crashes and impending doom. I thought it would be helpful to share a few strategies to help minimize the risk of reacting to media headlines and hopefully keep your portfolio on track.
1. It is important to understand that psychology plays a significant role in the investment decision process. Therefore, you shouldn’t allow yourself to be swayed by sensationalized media reports and learn to keep emotions in check. Act on what you know, not what you feel.
2. Embrace underperformance: No one wants to underperform the market, but doing so especially in a year like 2013, isn’t disastrous. To the contrary, underperforming the S&P in a strong bull market as a result of having a diversified portfolio is beneficial.
3. If you are a “go-it-alone” investor, follow one or two strategists at most. If you are spending more time reading market research reports than you are with your family, you are overdoing it, and are likely getting conflicting view points as well as contradicting guidance. This confusion can often lead to fear, which is a dangerous emotion to base your investment strategy on (greed is no good either).
4. The best virtues when it comes to investing are patience and discipline. An initial investment of $1,000 in the S&P 500 on January 1 1970, would now be worth $77,810 – which equates to a compounded rate of return just over 10% (Disclosure #1). If you missed the 25 best and 25 worst performance days (50 out of nearly 11,000 trading days) in this 43 year period, your annualized return would drop to just under 8 percent (Disclosure #2).
As an investment advisor I firmly believe that working with a professional maximizes an investor’s opportunity to reach their financial goals and avoid costly emotional mistakes. None-the-less, I recognize that many investors chose to go-it-alone. For those of you, who fall into that category, recognize that when it comes to portfolio performance we are often our own worst enemy.
Oliver Pursche contributed to this article.
Disclosure #1 – Source data: Bloomberg
Disclosure #2 – Source data: Bloomberg / Gary Goldberg Financial Services Research