How can a person improve their long-term investment return? The answer may surprise you. Many people can improve their returns by modifying their own behavior.
Let me re-state that: It may be your own behavior—not the market—that is letting you down.
Investment markets fluctuate constantly, but investors who stick with a balanced portfolio over the years tend to do well. An investment research firm regularly compares the average returns of the stock market with the actual returns earned by investors. The most recent survey showed that the S&P 500 stock index earned 9.2% per year over the last 20 years. The average stock fund investor, however, earned only 5% a year. Why is there such a gap?
Investor behavior is to blame. Investors generally do not invest their money in an indexed U.S. stock fund and leave it alone for 20 years. Instead, they buy and sell, often at the wrong time. With that in mind, what should a serious investor do?
- Look back at your own behavior with honesty. Did you get scared and sell during the market downturns? Or did you get greedy and throw money at stocks when the market kept going up?
- Admit that years of sound academic research are correct: There are no star money managers who consistently beat the market. Invest instead into a balanced allocation of stock and bond index funds.
- Treat the financial news as entertainment. A story telling you to diversify and hold your investments is boring. You will barely find a mention of it in the media.
- Rebalance your portfolio periodically. This will force you to sell high and buy low without trying to predict the markets.
It is the rare person who can successfully go it alone. Work with a fee-only advisor who can help you build a risk-appropriate, balanced investment portfolio.
For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.