How Can You Improve Your Long-Term Investment Return?

  By Matthew Jentner
Matthew Jentner

Many people ask me how they can improve their long-term investment returns. Typically, my answer surprises them, as it may surprise you. Many people can improve their investment performance by modifying their own behavior.

Let me state this another way:  It is more likely that your own behavior, not the investment market, is letting you down.

Investment markets fluctuate constantly, but investors who stick with balanced portfolios over the years tend to do well.

For years, a major investment research firm has compared the average returns of stock mutual funds with the actual returns earned by investors in those same funds. The most recent results showed that the average U.S. stock fund earned 8.2% per year over the last 20 years. The average stock fund investor, however, earned about 3.2% per year.

Why is there such a gap?

Investor behavior is to blame. Investors don’t plunk their money down into an indexed U.S. stock fund and leave it alone for 20 years. Instead, they buy and sell, often at the wrong time.

So if you want to improve your long-term investment returns, resolve to change.

  • First, look back at your own behavior with honesty. Did you get scared and sell out during the market downturns in 2008, 2002 or 1987? Did you get greedy and throw money at the tech stocks when the market kept going up in the late 1990s?
  • Second, admit that years of sound academic research are correct in concluding that there are no star money managers who will consistently beat the market. Instead, invest in stock and bond index funds.
  • Third, treat the financial news as entertainment. The networks, magazines and newspapers all are trying to catch our attention in order to get us to look at the advertisements that keep them alive. A story that says you should diversify and hold your investments is boring, and you will find barely a mention of it in the media.
  • Fourth, rebalance your portfolio periodically. That will mean selling portions of your recent winners and reinvesting the money into the laggards. This will force you to sell high and buy low.

You may want to get realistic and admit to yourself that it is the rare investor who can go it alone. Work with an advisor who can put your hopes and fears into perspective and help you sort out the reasons for or against taking precipitous action with your investment portfolio.

For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s newest white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.