With bad news seemingly everywhere and situated at the end of a long-in-the-tooth bull market it’s not hard to see why investors are rattled. But at times like this, it behooves investors to take a deep breath and rely on rules instead of emotions. To assist you in this difficult time, I’ve prepared a handful of “do’s” for worried investors, with the “don’ts” to follow in my next post.
Do Know Your History – Despite what political pundits and TV commentators would have you believe, this is not an unusually scary time to be alive. Although you’d never know it from watching cable, the economy is growing (slowly) and most quality of life statistics (e.g., crime, drug use, teen pregnancy) have been headed in the right direction for years! Markets always have and always will climb a wall of worry, rewarding those who stay the course and punishing those who succumb to fear.
Warren Buffett expressed this beautifully when he said, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” Such it has ever been, thus will it ever be.
Do Take Responsibility – Pop quiz! Which of the following do you think is most predictive of financial performance – a. market timing b. investment returns c. financial behavior? Ask most any man or woman on the street and they are likely to tell you that timing and returns are the biggest drivers of financial performance, but the research tells another story. In fact, the research says that you – that’s right – you, are the best friend and the worst enemy of your own portfolio.
Over the last 20 years, the market has returned roughly 8.25% per annum, but the average retail investor has kept just over 4% of those gains because of poor investment behavior. What happens in world financial markets in the coming years is absolutely out of your control. But your ability to follow a plan, diversify across asset classes and maintain your composure are squarely within your power. At times when market moves can feel haphazard, it helps to remember who is really in charge.
Do Work with a Professional – Odds are that when you chose your financial advisor, you selected her because of her academic pedigree, years of experience or a sound investment philosophy. Ironically, what you likely overlooked entirely is the largest value she adds – managing your behavior. Studies from sources as diverse as Aon Hewitt, Vanguard and Morningstar put the value added from working with an advisor at 2 to 3% per year. Compound that effect over a lifetime and the power of financial advice quickly becomes evident.
Vanguard suggests that the benefit of working with an advisor is “lumpy”, that is, the effects of working with an advisor are most pronounced during periods of volatility (like today). They go so far as to break out the impact of the various services provided by an advisor, and while asset management accounts for less than half of one percent, behavioral coaching accounts for fully half of the value provided by working with a professional. Today is the day your financial advisor earns her keep. Don’t be afraid to reach out to your advisor during times of fear and seek her reassurance and advice. After all, she’s saving you more money by holding your hand than by managing your money!