As a financial planner, I often hear people talking about the latest
investment portfolio or the latest product on the market. While product is
important, I believe that the most important piece of financial security is
personal discipline: how you handle your life circumstances and how you will
react to inevitable market volatility.
What does this mean? Well,
imagine you found a magical product that earns 10% a year. You still could have
other areas that need to be taken care of, such as insurances in case of death
or becoming disabled, health insurance, auto insurance and having emergency
cash set aside to allow that magical 10% product to grow uninterrupted.
You’re not likely going to
find a 10% rate of return in today’s market unless it's extremely risky. And if
it is, you should still consider having other products in place for a rainy
day, short-term cash needs, and, if you're within five years of retiring or
five years into retirement, you will probably want to think about a product
that will provide income and potentially balance out your losses should your
more risky investments suffer from a temporary market fluctuation.
Certain historical studies
have been conducted that focus specifically on investment behavior. In studies
where the market has gained a percentage of rates of return over a period of
time, the average investor has not fared as well.
DALBAR’s1
Quantitative Analysis of Investor Behavior shows that over a 20-year period,
from 1990-2009, the S&P 500 has experienced an 8.2% rate of return (not
including fees). However, they also found that over that same 20-year period,
the average equity investor only earned a 3.17% rate of return. The main key to
that difference is personal discipline. The study found that over the 20-year
period, investors held their investments for an average of 3 years each.
Past performance may not
indicate future performance, but even if there was a way to guarantee an 8.2%
rate of return with no fees, you would need to have personal discipline enough
to ride out the scary and troubling times that the market will inevitably have.
As my children went
through the DARE anti-drug program
at school, I constantly reminded them that it’s not if their friends or classmates ever use drugs but when a friend or classmate uses drugs. Now, apply that
to the market. It's not if the
market is volatile, but when
it's volatile.
As an investor, you need
to be prepared for the potential and very certain possibility that there will
be a time when your hypothetical $100,000 investment drops to $60,000.
Economists would argue that hopefully, over time, that investment will come
back and that would be the desire of everyone involved. But, as an investor,
you need to be able to say that you’re not going to look at the investment and
that you will leave it alone. The optimist would say, “not only am I going to
leave it alone and not look at it - I might even buy more because it's potentially
undervalued at its current price.” Regardless, if you cannot practice this very
necessary personal discipline, it's not market performance of the product that
matters.
At Kemp & Associates, we know how
difficult it can be to choose your investments wisely. For advice on managing
your savings, contact
us today.
1 "Quantitative
Analysis of Investor Behavior (QAIB)" DALBAR, 2011; http://www.dalbar.com/ProductsServices/AdvisorSolutions/QAIB/tabid/214/Default.aspx
All
information herein has been prepared solely for informational purposes, and it
is not an offer to buy or sell, or a solicitation of an offer to buy or sell
any security or instrument or to participate in any particular trading
strategy.
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Opinions
voiced on this blog are not intended to provide specific advice and should not
be construed as recommendations for any individual. To determine which investments may be appropriate for you,
consult with your financial, tax or legal professional. Please remember that investment decisions
should be based on an individual’s goals, time horizon, and tolerance for
risk. There are no guarantees that
any investment strategy will meet its intended objective.
