In the past six weeks, the stock market reminded all of us in the Crossroads that our old friend, Mr. Volatility, is not dead. He is alive and well and seems rather upset he has not been front and center in the news. Worse, yet, Mr. Volatility has taken jabs at his neighbor, Mr. Emotion. Together they are a wicked combination.
Since late April, the stock market declined about 10 percent. While this is not the end of the world, it is enough to get your attention.
This prompted a call from my Uncle Harry who said he wanted out of the stock market because the Euro currency was going bankrupt and the U.S. dollar would soon follow – which would lead to a worldwide crash of all stock markets. Hmm …
We have no idea if this is going to happen. At a minimum, it is an incredibly complicated situation with numerous political sub-plots. It is a broad leap to say the Euro is going down and will lead to a worldwide stock market crash. The world has experienced many currency “crashes” in the past, and yet, we are still here to talk about them today. Despite these hurdles, the world’s stock markets have also managed to grow.
The news media seized upon this issue, and the related volatility, and paraded out a series of “Dr. Doom” type experts to inform us of the impending end of the world.
All of this is enough to test the patience of virtually anyone. For this reason, we advise people you should not invest in the stock market for one day if you are not willing to hold for at least 10 years.
We have never been able to “out trade” the markets, and the long-term facts indicate poor results for others, too.
Recently, there was an interview with one of the most successful money managers from 2000 to 2009. This manager generated average annual returns of 18 percent during this 10-year period. This was very impressive because the S&P 500 broke even during the same time.
Oddly, the average investor in this fund actually lost 11 percent per year during this same time period.
How could this be? Was the manager Bernie Madoff or Allen Stanford? Were these investors the victims of some horrible fraud? No – there was no fraud and the numbers are legitimate.
In fact, a long-term investor who placed money in 2000 and left it alone through 2009 earned 18 percent annually. The culprit for the performance difference was the average investor who was led by their emotions. As such, they jumped in after this fund produced strong returns. And then, when the fund experienced volatility and dropped a bit, they jumped out.
This fear- and emotion-based jumping in and out turned the performance of a highly profitable investment into a consistent money loser.
A similar study followed the average stock investor from 1986 through 2005, a time in which the S&P 500 produced gains of almost 12 percent per year. Unfortunately, the average stock investor only earned returns of about 3 percent per year during the same time.
Once again, investors who jumped in and out hurt themselves.
The stock market is not for everyone. For those who are going to invest – as opposed to trade – in stocks need to realize two things:
There will be tremendous amounts of volatility and fear during short periods.
No one should invest in stocks with less than a 10-year holding period.
Author: Dave Sather
Originally published Monday, June 14, 2010
Victoria Advocate