Sometimes a picture really can make things easier to understand. Many of the important ideas and concepts you need to know as a long-term investor don’t require lengthy explanations. They can be as simple as these four charts. Together, these charts illustrate foundational principles of investing such a focusing on the long term, diversification, and not letting emotions compromise your portfolio.
Average stock investor and average bond investor performances were used from a DALBAR study, Quantitative Analysis of Investor Behavior (QAIB), 04/2018. QAIB calculates investor returns as the change in assets after excluding sales, redemptions, and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses, and any other costs. After calculating investor returns in dollar terms (above), two percentages are calculated: Total investor return rate for the period and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions, and exchanges for the period. The fact that buy-and-hold has been a successful strategy in the past does not guarantee that it will continue to be successful in the future. S&P 500 returns do not take into consideration any fees.
What This Chart Means to You: Don’t try to time getting in and out of the market. It’s like trying to go faster on a crowded freeway by constantly changing lanes, only to discover you are going slower than if you had just stayed in the lane you were in. Over the past 20 years, the S&P 500 returned an annual average of 7.20% but average U.S. stock investors earned just 5.29%, primarily because they tried to outsmart the market but kept getting in and out at the wrong times. Many investors think they know when to buy and sell. But this means they have to be right twice: picking the right time to buy and the right time to sell. Other investors might make emotional decisions, like pulling out of the market when stocks are losing.
This is where the experience and guidance of your financial advisor can make all the difference and help you stay “in your lane” and headed towards your goals.