Should You Care What the Market Does Each Day?
A calm investor may realize better long-term returns than an overly concerned one.
Investors are people, and people are often impatient. No one likes to wait in line or wait longer than they have to for something, especially today when so much is just a click or two away.
This impatience also manifests itself in the equities markets. When the S&P 500, Dow, or Nasdaq take a tumble, some investors grow uneasy. Their impulse is to sell, get out, and get back in later. If they give into that impulse, they may effectively pay a price.1
Across the twenty years ending in 2015, the annual return of the S&P 500 averaged 9.85%. During this same period, the average retail investor realized a yearly return of just 5.19%. (These numbers come from Dalbar, a respected investment analytics firm.) Why the difference? It could partly stem from impatience.1
Some investors may be worrying too much – and acting on those worries to their detriment. An investor who glances at a portfolio once per quarter may end up making more progress toward his or her goals than one who anxiously pores over financial websites every day.1
Too many investors make quick, emotional moves when the market dips. Logic often goes out the window when this happens, along with long-term perspective.1,2
Investors who care too much about day-to-day market behavior may practice market timing, which is as much hope as strategy.2
To make market timing work, an investor has to be right twice. Ideally, he or she sells high, takes profit, and buys back in at some point of capitulation – a moment when bears throw in the towel and the market rallies off a bottom. How many investors can pull this off? This is hard even for Wall Street professionals. Mostly, retail investors buy high and sell low. Picture a shopper only buying an item at a department store when the price rises, then returning it when it goes on sale – but only getting the sale price back.1
Investors who alter their strategy in response to the headlines may end up changing it again after further headlines. While they may feel on top of things by doing this, their returns may suffer from their emotional and impatient responses.1
Nobel Laureate economist Gene Fama, Jr. once commented: “Your money is like soap. The more you handle it, the less you’ll have.” Anyone who has invested some of their money in equities would do well to keep his gentle warning in mind, especially at times when markets grow turbulent.1
Citations.
1 – thebalance.com/why-average-investors-earn-below-average-market-returns-2388519 [8/28/16]
2 – usatoday.com/story/money/personalfinance/2016/01/30/3-reasons-you-shouldnt-worry-stock-market-2016/79304046/ [11/9/16]
This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by MarketingLibrary.Net Inc., for Mark Lund, Mark is known as a Wealth Advisor, The 401k Advisor, Investor Coach, The Financial Advisor, The Financial Planner and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. an independent, fee-only, Registered Investment Advisor firm providing investment and retirement planning for individuals and 401k consulting for small businesses. Stonecreek is located in Salt Lake City, Murray City, West Jordan City, Sandy City, Draper City, South Jordan City, Provo City, Orem City, Lehi City, Highland City, Alpine City, and American Fork City in Utah.
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