(Graphic | Courtesy of Cornerstone Financial Planning)
For most of us, achieving a financially secure retirement takes a disciplined, long-term investment approach. Unfortunately, numerous studies have shown that typical investors take exactly the opposite approach. Year after year, a study conducted by Boston researcher DALBAR, Inc., reveals that the average mutual fund investor makes their investment decisions out of an emotional reaction to the short-term performance of the financial markets¹.
The typical investor behavior described by DALBAR, Inc. can be attributed to natural human emotions. After the stock market performs well, investors typically try to jump on the bandwagon and pour money into stock funds, only to see the value of their investments shrink when the market makes a quick correction. Conversely, when the market declines, investors typically sell their stock funds in a flight for safety. When investors begin to return to the stock market, it’s typically after the market has made a substantial rebound. When this happens, investors are effectively buying back stocks at a higher price than they had sold them. Some other common mistakes made by individual investors include:
- Failure to maintain proper investment diversity
- Reacting to news events in the media without reasonable evaluation
- Buying and selling funds solely based on historic performance or the evaluation of rating services
In times of stock market volatility, many investors just can’t resist the urge to pull out of the market until things settle down. But as the graph demonstrates, missing just a few of the market’s best days can dramatically reduce returns.
A time-tested investment approach is utilizing professionally-managed asset allocation portfolios that are designed to provide investors with the investment discipline needed to help them achieve a secure retirement
In addition, regular and consistent investments into the portfolio, in both up and down markets, can significantly increase the long-term performance. Investors who participate in a company retirement plan take advantage of this process. If you don’t have a company sponsored plan, your financial institution can set up a monthly draw from your bank account to mimic this process.
Provided by Ed Wettig, CFP, Cornerstone Financial Planning Group, which offers investment management, financial planning and retirement income strategies. Representative is registered with and offers only securities and advisory services through PlanMember Securities Corporation, a registered broker/dealer, investment advisor and member FINRA/SIPC. 6187 Carpinteria Ave, Carpinteria, CA 93013, 800-874-6910. Cornerstone Financial Planning Group and PlanMember Securities Corporation are independently owned and operated. PlanMember is not responsible or liable for ancillary products or services offered by Cornerstone Financial Planning Group or this representative.
¹Source: Quantitative Analysis of Investor Behavior© 1994-2020 by DALBAR, Inc.
²It is not possible to directly invest in an index. (graphic)
³Source: Google Finance and PlanMember Securities Corporation. Results shown reflect share price changes only and do not include taxes or the reinvestment of capital gains and dividends. Past performance is not a guarantee of future results. (graphic)