Have you ever lost a lot of money investing? If you have, or know someone else who has, investing can be scary. Yet most people know they will never earn enough to reach their goals by stuffing all their money under the mattress or in the bank.
Everyone wants their money to grow as quickly as possible, and no one likes losing money. However, there is no such thing as something for nothing. You can never receive high returns if you never take any risk. On the other hand, if you take too much risk, you could lose it all. How can you find the proper balance and be confident that your investment strategy will pay off in the long-run?
Most people are their own worst enemy when it comes to investing. All too often they buy or sell stocks, bonds, mutual funds, gold, real estate—you name it—based on exaggerated claims they heard on the news, in an advertisement, or from a friend, in hopes of landing a quick gain or avoiding a big loss.
The truth is that no one really knows what will be the next hot stock or when the market will crash again. If they did know, why would they tell you instead of just maximizing profits for themselves? If investing were that easy, we would all be billionaires. Investors who follow this type of hype from the “experts” tend to lose a lot of money in the long run.
How much can investors lose by chasing the hype? According to DALBAR Research, from 1984 to 2013, the average annual return for the S&P 500 was 11.1%, while the average equity investor only earned 3.7% because of this type of behavior.[i]
This means that $100,000 would have grown to only $297,000 for the average investor, barely keeping pace with inflation over those 30 years, when it could have grown to $2,352,000 by properly diversifying and ignoring the advice of financial “fortune tellers.” That’s a loss of over $2,000,000 for trying to outguess the market!
Markets are random and unpredictable in the short run, but in the long run the returns tend to be excellent for those who have realistic expectations and know how to harness its power without getting burned. In order to be a successful investor, you don’t have to know everything, but you do have to know the right things, and you need a trusted coach to guide you through both the good times and the bad times.
You must understand where market returns come from and which types of risk are worth taking. You must have realistic expectations about how your investments could behave over a short period under a variety of economic conditions. You must also know how much risk you are willing to take to meet your goals.
Then you must build a well-diversified mix of investments to match your risk tolerance, and stick with your strategy through thick and thin without worrying about what other people are doing. Only then can you be confident that your investments are performing at their very best.
What is your main purpose for investing? If you have already retired, maybe you are wondering how your investments can safely provide income for the rest of your life. If retirement is well into the future for you, maybe you’re more concerned about maximizing your growth between now and retirement. No matter what your objectives are, we can give you the education, tools, and ongoing coaching you need to be a confident, successful investor throughout all stages of your life.
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[i]“Quantitative Analysis of Investor Behavior, 2014,” DALBAR, Inc., <www.dalbar.com>. Additional disclosures required by DALBAR:
Equity benchmark performance and systematic equity investing examples are represented by the Standard & Poor’s 500 Composite Index, an unmanaged index of 500 common stocks generally considered representative of the U.S. stock market. Indexes do not take into account the fees and expenses associated with investing, and individuals cannot invest directly in any index. Past performance cannot guarantee future results.
Bond benchmark performance and systematic bond investing examples are represented by the Barclays Aggregate Bond Index, an unmanaged index of bonds generally considered representative of the bond market. Indexes do not take into account the fees and expenses associated with investing, and individuals cannot invest directly in any index. Past performance cannot guarantee future results.
Average stock investor, average bond investor and average asset allocation investor performance results are based on a DALBAR study, “Quantitative Analysis of Investor Behavior (QAIB), 2014.” DALBAR is an independent, Boston-based financial research firm. Using monthly fund data supplied by the Investment Company Institute, 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, two percentages are calculated for the period examined: Total investor return rate 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.
Systematic investing examples are hypothetical and for illustrative purposes only. Systematic investing involves continuous investments regardless of security price levels. It cannot assure a profit or protect against a loss in declining markets.