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3 Things 8-12-24

Thing One



Why The “Average Investor” Underperforms The Market



According to marketwatch.com, the 20-year annualized return of the S&P 500 was 7.68% while the average equity fund investor’s return was 4.79%. In trying to account for the gap, those researching it often look at fees as they assume they’ll account for the bulk of the difference there. What they are finding is that fees aren’t the biggest issue, human behavior is. Yes, there are times when competing needs for capital or lack of capital are the chief cause, but at least half of the time, psychology is the cause of the investment shortfalls.



Specifically, investors tend to make emotional decisions in both directions. When the market is going up, they get excited and follow the herd in. When the market is going down, they get nervous and follow the herd out. They buy high and sell low, in other words, because their emotions get the best of them. So what to do? Well, Dana Anspach of thebalance.com has four pretty good tips on how to avoid succumbing to bad investing impulses:



1. Do Nothing



A conscious and thoughtful decision to do nothing is still a form of action. Have your financial goals changed? If your portfolio was built around your long-term goals (as it should be), a short-term change in markets shouldn't matter.



2. Know That Your Money Is Like a Bar of Soap



To quote Gene Fama Jr., a famed economist, “Your money is like a bar of soap. The more you handle it, the less you’ll have.”



3. Never Sell Equities in a Down Market



If your funds are allocated correctly, you should never have a need to sell equities during a down-market cycle. This holds true even if you are taking income.



Just as you wouldn’t run out and put a for-sale sign on your home when the housing market turns south, don’t rush to sell equities when the stock market goes through a bear market cycle. Wait it out.



4. Trust That Science Works



A disciplined approach to investing delivers higher market returns. Yeah, it’s boring; but it works. If you don't have discipline, you probably shouldn't be managing your own investments.



I’d add to that list number five, which would be:



Find an advisor you can trust.



Thing Two



Advice From A Long Time Investor



A year or so ago ago, Andy Kessler, wrote the following in his column in the Wall Street Journal:



“…Maybe stocks will revert to the mean, but what is normal anymore? I remember a Wall Street strategist who claimed stocks go from 25% undervalued to 75% overvalued. Sensible but wrong—the price is always right. Stocks end every trading day valued correctly. Yes, even in the past few weeks, with stocks rising and falling like a runaway roller coaster. Billions of shares traded balance millions of bullish and bearish thoughts to reflect consensus expectations. Or as Efficient Market Hypothesis believers say, “Asset prices reflect all known information”—emphasis on known.



Correct compared with tomorrow? Heck no. In the long term, the consensus is always wrong. In the past 40 years, the S&P 500 has ended the trading day unchanged only 10 times. Inputs change. Expectations change. Macro information changes. Industries change, sometimes ever so slightly. Markets move up or down to reflect new information and investor moods and stuff out of left field. Bull markets climb a wall of worry and top out when there is nothing left to worry about and all the good news is baked in…Investing is a fashion. Any stock or crypto will work until it doesn’t.”



Well, it seems we’ve now reached the point where some of it doesn’t work. Or have we? Frankly, that question isn’t answerable until either the company you’ve invested in goes out of business or you give up and sell. Before you do the latter, recall why you put your money up in the first place. If you had a soundly reasoned proposition with a long-term perspective, maybe you should stay the course, and maybe you shouldn't. If you were just out to make a fast buck, maybe you should stay the course, and maybe you shouldn't. The point is that in the first instance, you actually were investing and in the second you were likely gambling - even if that wasn't your intent. Both are okay but you should be careful to make the distinction upfront.




Thing Three



Just A Thought



“Do something today that your future self will thank you for." - Unknown

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