 |
From Bob Irish, retirement specialist, Palm Beach Research Group: The good market we’ve enjoyed for the last seven years will go south—I can promise you that.
When it does, most investors will do what they’ve always done: sell at the wrong time. The average investor has made a habit of buying high and selling low. Not exactly a formula for success.
Dalbar, a leading market research firm, has put a number on the cost of this bad behavior…
Over the last 20 years, the S&P averaged 7.81%. That means $100,000 invested in the market 20 years ago would be worth $450,000 today.
But over the same time frame, the average stock fund investor earned just 3.49%. So that same $100,000 would be worth just $198,000 today. That’s a quarter-million-dollar difference.
Dalbar’s study is no fluke. Study after study has reached the same conclusion. Equities do well. People, not so much. Why?
Most investors don’t prepare themselves for the emotions that surface during a bad market. In a good market, it’s hard to remember what it feels like to be in a bad market. But successful investors expect volatility. They understand declines are a natural part of the investment cycle.
Being prepared for the choppy markets ahead is all about having realistic expectations. So let’s look at the facts…
Wall Street doesn’t like to talk about the potential for portfolios to go down in value. That’s because it’s in the business of promoting optimism.
But portfolios do go down. Take a look at the declines in the Dow Jones industrial average since 1900:
Remember, some declines last much longer than these numbers might suggest (like the market meltdown of 2008). The market goes down on a regular basis.
Over the last 87 years, the market’s had 64 up years and 23 down years. The average up year was up 21.2%. The average down year was down 13.6%. The worst year was 1931 (down 43%), and the best year was 1954 (up 54%).
2013’s market was one for the books: up almost 30%. That’s the biggest gain since 1997. It blew away the average market return since 1926 (10%).
But average returns are misleading. There were just two years when the market gained 10-point-anything: 1993 and 2004.
While it’s instructive to look at market history over a long period, nobody has a 100-year investment horizon. But most of us can relate to 10 years.
History tells us that, over a 10-year period, the market will probably have seven up years and three down years. So you should expect the value of your portfolio to decline three years out of every 10.
You can mitigate the effect of those down years by strictly following PBRG’s risk-management protocol.
|
Recommended Link Bill Bonner’s Most Successful Analyst Reveals His Top Picks
According to a 2014 audit, anyone who followed this expert’s recommendations over a 10-year period could have turned $100,000 into $480,000—and beat many of the best investors in the world. Click here to learn more. |
