Darryl W. Lyons
Co-founder | Author of Small Business Big Pressure | Financial Advisor | Investments | Insurance | CEO
The lack of trust today feels like smog. This smog engulfs the horizon of investing. We have a lot of optimistic clients in our San Antonio Financial Planning office but when I turn on the TV, it seems that the general thought is the stock market is rigged and over inflated. Maybe I’ll expand on this in a later argument, but for now, let’s set aside any cynicism and look at what we can personally control.
Historically, equities (better known as stocks) have performed better than most other types of investments. According to historical records, the average annual return for the S&P 500 since its inception in 1928 through 2014 is approximately 10%. Index performance is not indicative of the performance of any investment http://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
The reason it has worked well in our country and now globally is because people want and need tires, toothpaste, drugs, Starbucks, and Pokémon. To place their products in various stores, the companies need money and the stock market is their piggy bank.
However, the supply and demand of the stock market isn’t the problem. It is you and me.
Mistake #1: We mess with our money too much.
How often do you rebalance your portfolio? Monthly, Quarterly, Annually? Do you look at the last year’s winners and shift some money over to the ones who won last year? If you are actively moving money around, you may be reducing your chances. According to a Vanguard study on rebalancing https://www.vanguard.com/pdf/icrpr.pdf, you would be better off rebalancing annually rather than monthly or more frequently. The case is even stronger if there are trade costs associated with your adjustments or taxes due when selling. The point is this…don’t chase winners and aim to reduce excessive rebalancing.
Mistake #2: We look at our statements too frequently.
Why? If you are watching the negatives pop up on your statements you tend to react and tone down risk. As a result, you reduce the probability of capturing the potential for returns. Thalar expanded on this behavioral finance dilemma in his book Misbehaving: The Making of Behavioral Economics.
In full disclosure, the historical returns of the S&P 500 stocks are not certain and you can’t guarantee them. The biggest challenge for investors is not the math, it’s the behavior.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges
No strategy can assure success or protect against loss. Investing involves risk including loss of principal.