Have you ever been in a (financial) traffic jam?
Have you ever been in a traffic jam? If you have ever driven on the 5, 10, 15, 405, 101, 110, 40, 70, 35, 91 or 95 it is likely that you have been stuck in a traffic jam. I would put the odds at 100%. At any point during your stay in a traffic jam did every contemplate getting out of the car and walking thinking that it would get you to your destination faster? You may have if you only had a few short blocks to drive but certainly not if you were driving a longer distance.
To drive from Austin to Dallas on I-35 takes about 3 hours and 30 minutes. On I-35 there is more than enough opportunities to get stuck in a traffic jam. However, I have never contemplated walking to Dallas from Austin because of these minor traffic jams. According to Google Maps it would take me 64 hours or about two and a half days to walk this route. I don’t like traffic jams but they are part of driving.
In the early 1970’s my mom, sister and I went to visit my cousins in Laguna Beach. We spent the day at the beach and stayed for dinner. On the way home to Los Angeles we were caught in the mother of all traffic jams. As a young one I did not handle it well. It was dark and we were not moving. I was convinced the end of the world was near and I would never see my dad, my other sister or my friends ever again. My fears were unfounded because at some point the traffic would start flowing again. I am happy to say we made it home without incident.
What does a traffic jam have to do with investing? In tough times when the stock market is not cooperating investors want to jump ship and sell all of their investment holdings and wait for the market to give them an all clear signal. Do you need a little proof? Here are a few examples.
The Investment Company of America mutual fund had a 15 year return of 5.22% while the individual investor in this same fund generated 3.91%. A $100,000 investment in this fund would have returned $214,523 if you stayed the course. The investor return was $177,770. The investor left $36,752 on the table.
The Vanguard S&P 500 mutual fund, the patriarch of all funds, had a 15 year return of 4.28% while the investor made a 2.03% return. $100,000 in this fund would have grown to $187,506. The investor made $135,181 losing out on $52,324.
The Fidelity Magellan fund had a 15 year return of 2.72% while the investor in this fund actually lost 1.19%. A $100,000 in the Magellan fund is now worth $149,563. The investor’s $100,000 is now worth $83,562 for a spread of $66,001.
An investor who invested in these three funds and stayed the course would have picked up an extra $155,077 for their account.
It does not pay to buy and sell based on the headlines or market conditions. The next time you run into a financial traffic jam remember that it will eventually pass.
A driver today can access a number of tools to help them get to their destination safely. With GPS it is easy to navigate the nation’s highways. Like a GPS for your car, a financial plan can be your GPS to pilot you through today’s markets and allow you to focus on your long term investment goals.
Bill Parrott is the President and CEO of Parrott Wealth Management, LLC. www.parrottwealth.com.
Source: Morningstar Hypothetical. The 15-year return is as of 1/31/2016.