There’s been a lot of negative news headlines recently and I’m hearing the phrase “with what’s going on right now, should I just cash everything out until things calm down?” when having new meetings with prospects. If you’ve been thinking or wondering the same thing, just know you’re not alone.
As with most things in life if you are failing to plan, you are planning to fail. While these types of feelings are very normal and understandable the issue is that relying on emotions is about the worst way to go about making any financial decision. According to Dalbar, the average retail investor has only made a little bit more than half of the SP500’s return on average in the stock portion of their portfolios over the last 30 years. Because of how compound returns work, earning a little over half results in one having substantially less than half at the end of the day. The average retail investor would have seen over the last 30 years $100,000 in stocks grow to $615,000 at the same time the same amount invested in the stock market would have grown to over $2,100,000. A nearly $1.5 million difference on a starting investment of $100,000 is pretty substantial to say the least!
One big reason for this difference is that far too many retail investors rely on emotion, particularly fear and greed. A great example of this is how investors fared in the high flying and highly volatile Fidelity Magellan fund from 1977-1990 under the management of the legendary Peter Lynch. During those years the fund posted an astounding average annual return of 29%, yet according to Fidelity the average investor in the fund actually LOST money while Lynch was at the helm. You might be asking how can that be? Well, with this fund during these years there would be a time period of huge outperformance followed by time periods of underperformance. There would be huge inflows right after the outperformance and huge outflows after the underperformance. People like to hop on board with ‘what’s hot’ right now (think energy companies today, real estate in 2007, tech stocks in 1999, tulip bulbs in 1634, etc.) and then panic sell after steep drops and/or underperformance. People see others getting rich and want to get rich too (greed) and those are the people that usually are left holding the bag when the bubble inevitably bursts and panic selling occurs (fear).
Generally speaking it’s not wise to own or buy ‘what’s hot’ right now as most of the easy gains or possibly even all of the gains have already been realized. In our flagship portfolio we like to buy into ownership of good, well run companies where there is some sort of temporary issue or short term negative news, but still a terrific long term outlook. We’re not trying to buy, for instance, companies that have both short term and long term issues (think wagon wheel or buggy whip makers back in the day). Medical device companies would be a great recent example of those with a short term issue, but great long term outlook. With Covid, elective procedures (many of which utilize medical devices like a knee replacement) were banned in much of the country for a time and certainly were down even after restrictions eased due to other factors such as staffing shortages. As a result, many medical device companies saw sales and profits plummet. The thing is, though, that long term if you need something like a knee replacement, you still need it! So, in the short term these companies were not doing well, but over the long term their business will not only resume to what it was previously, but become even larger and better as all of the backed up procedures that were put off are done on top and in addition to normal business.
The other thing that is really important in regards to how we go about planning for clients is that our flagship growth portfolio is managed to in a worst case scenario be worth the same 3 years from now as it is today. In other words, if there are any losses we want them totally eliminated in less than that time frame. Our clients then don’t have to worry about what is going on with the economy, elections (which happen every 2 years), global wars (over the last 90 years there has been a major global conflict or war on average every 2.72 years), or any other major negative news making headlines. If we put 3 years worth of desired income into some sort of conservative investments then a client can draw from them the income they want and need and by the time they’re used up the rest should be recovered eliminating ever having to ‘sell low’ to generate income or worry about ‘what is going on in the world.’ In fact, we find that usually the greatest outperformance occurs when things are uncertain and volatile as that is when there is the most opportunity.
If you’re worried about current events it likely means you don’t have a plan or have a bad one. Relying on emotion not only usually leads to poor results, but also a lot of unnecessary stress and anxiety. A good, solid plan can not only eliminate both of these issues, but cause one to actually excel, outperform, and profit when things are becoming rocky by taking advantage of those that don’t have a plan and are panicking.
If you’re interested in working with a financial advisor in Topeka to help you create a better investment and retirement plan give our office a call today at 785-228-0222.
Material discussed is meant for general/informational purposes and is not intended to be used as the sole basis for any financial decisions, nor be construed as advice to meet your particular needs. It is also not a recommendation to buy or sell any particular investment. Investing in securities involves risk and profit cannot be guaranteed. Please consult a financial professional for further information.