The first quarter of 2017 is in the history books. As Ben Weaver likes to say, “The days are long, but the years are short.” So let’s take a quick trip down memory lane. Last year at this time, the media was harping about the US market being off to its “worst start in 83 years.” Oil was “collapsing,” China was “teetering on the brink,” and Brexit was going to “tank the UK and bring down all of Europe in the process.” The Dow Jones Industrial Average (DJIA) fell below 16,000. But the world didn’t end (it rarely does). In fact, markets staged a comeback and the media changed their tune to the “best intra-quarter recovery in 83 years.” Indeed, the DJIA now sits at 20,855. All the doom and gloom that terrified folks in January 2016 was seemingly forgotten by March 2016. Now as we kick of the second quarter of 2017, the media has returned to its refrain of the sky getting ready to fall. There’s a palpable sense of fear that something’s got to give, right?
The research group DalBar publishes an insightful study that compares the investment returns of the average US retail investor with the returns of the US market (as measured by the S&P 500). The results are eye opening. The average US retail investor captures less than 35% of the US market’s gains. In other words, the average US retail investor does 65% worse than if they invested in the market — and then did nothing. Why? Because the average US retail investor fears volatility. And their efforts to avoid volatility destroys their long-term returns.
Volatility isn’t bad just because it means fluctuating values. Rather, volatility is bad because it drives emotion and emotions drive poor decisions.
Here are some examples — maybe you’ve heard (or thought) them before:
Thought: “I’ll wait until the future is more clear.”
Reality: It is never clear.
Thought: “The horizon is too cloudy to be safe.”
Reality: It is always cloudy.
Thought: “Sell XYZ because it is not working.”
Reality: That is selling low.
Thought: “Buy ABC because it is working”
Reality: That is buying high.
Thought: “It has never been this bad/good.”
Reality: Every panic/bubble since the beginning of time has left this impression. The same will be the case in the future.
Thought: “I want the upside, but not the downside.”
Reality: You will get neither.
Successful wealth creation and protection comes from understanding and even embracing the stark reality of long-term investing: There is nothing to fear but fear itself – especially one’s reaction to it. (Watch FDR’s 1932 speech here, for a boost in confidence about our abilities to endure.) If we do not master our emotions, they will master us — as evidenced by the poor returns of the average US retail investor, who is governed by fear. So in the investment realm, we acknowledge volatility, persevere through it by sticking to your plan – and by doing so, we actually profit from volatility over time.
Thanks for reading!
Chief Operating Officer