The ART in FIRE

Take Some Pepto and Call Me Tomorrow

On the Money

By Ben Reynoso

It’s perfectly normal to feel nervous in a scary market.  We are all human.  While it’s OK to feel nervous during these types of markets, it is NOT OK to act on the fear.

In the next few paragraphs, I’m going to share with you how to get the returns you deserve from your investments.  How to achieve the returns that are rightfully yours?  Just tear out this article and stick it to your refrigerator, bathroom mirror, or some other place to serve as a reminder to not make the BIG mistake.

Your investing behavior matters.  Investing behavior?  Yes, your investing behavior matters because making some of the classic behavioral mistakes has cost the average investor close to 7% per year – over half the potential earnings.

Research on investor behavior has again confirmed that many of us just aren’t wired to make good investment decisions.

DALBAR, Inc., a Boston-based company that provides research for the financial services industry, examined mutual fund investors’ results in equities markets during the 20-year period that ended December 31, 2008. DALBAR research reported from 1987-2008 the S&P 500 posted a gain on 11.8%, while the return for the average investor was only 4.8%.

That’s not a typo – the average investor only earned 4.8%  What’s so striking about this is the performance of the S&P 500 index from 1995-1999 was +37.6%, +23.0%, +33.4%, +28.6%, and +21.0% respectively.  During one of the greatest bull markets in our history, behavioral mistakes cost the average investors close to 7%!

How did this happen?  During the period of 1987-2008 there were only a handful of money-losing years. But the steep declines in stock markets caused investors to panic and make bad market-timing decisions – buying high and selling low and intensifying their losses.  Our fear is heightened during periods of uncertainty by the media.  Turn it off.

We know it doesn’t make sense to buy high and sell low.  We’ve known that since we were kids.  But we all do it, and we do it over, and over, and over.  (We sabotage ourselves, shoot ourselves in the foot, insert your own cliché).
It’s time to change the way you invest and it has very little to do with finding the perfect investment – it’s all about changing your behavior.

Investing requires objectivity, and few of us have it, especially when it comes to our money.  We all struggle to not make emotional decisions about our investments.  It’s not easy and asking for help doesn’t mean you’re weak.

The solution sounds simple, but you need someone who cares as much about your money as you do, but has the emotional distance to make smart decisions.

To the extent that you can control your emotions and behavior as it pertains to investing, you’ll have the opportunity to achieve the returns you deserve.  So always be aware when you are making decisions based on fear and greed, instead of what’s in the best interest of your long-term investing goals.

Remember this quote from Benjamin Graham, author of The Intelligent Investor, “The investor’s chief problem – and even his worst enemy – is likely to be himself.”