Investing Is Easy
I recently read a post where an advisor said investing is easy, and he recommended buying two or three index funds and holding them forever. While I agree with his thesis, investing is challenging because it requires emotional fortitude, and that's where we fail. To create generational wealth, you must buy and hold stocks through the down years, which is the hard part. Shelby Davis said, "You make most of your money in a bear market; you just don't realize it at the time."
Since 1926, the S&P 500 has generated an average annual return of 10%, but to receive this return, you had to start investing 96 years ago, allocate 100% of your assets to stocks, and never sell. I doubt this person exists. This year, US stocks are down 18.5%, international equities have fallen 23.2%, and global bonds have dropped 13%. A traditional 60% stock and 40% bond portfolio is down 14.5%. Long-term gains come from short-term pain because risk and reward are related.
Advisors compile raw data and say if you had bought XYZ fund ten years ago, you'd be up X% today, but the numbers do not capture the emotional component of the investor. Emotions make investing difficult. I can access hundreds of thousands of data points, but it doesn't matter if a client is losing money and panicking. Their primary concern is getting out of the market, and they could care less about historical data.
From 1961 to 1979, inflation soared from 0.7% to 13.3%, an increase of 1,800%. During that time, the S&P 500 produced an annual return of 7.2%, international stocks averaged 9.8%, and long-term bonds gained 2.95% per year. US stocks lost 39% from 1973 to 1974, long-term bonds dropped 12.5% from 1968 to 1969, and international stocks fell 56% in 1975. A few years later, you met the stock market crash in 1987, the Gulf War in 1991, the Tech Wreck in 2000, the Great Recession in 2008, COVID in 2020, and the current correction. However, if you still own your investments from 1961, your equity returns averaged 10.36%, international stocks returned 10.8%, and long-term bonds produced an average annual gain of 6.52%. Small-cap stocks delivered an average annual return of 12.7%. Time in the market wins.
Picking a few funds or stocks is easy, but managing your emotions is challenging. We are our own worst enemies.
Here are a few suggestions to help you improve your investing program.
- Create a financial plan. Your financial plan quantifies your goals and dreams and can keep you grounded when stocks and bonds fall. It can change your time horizon from days to decades and keep you focused on what is important to you and your family.
- Ignore the media. Media outlets and social media sites constantly post news about markets, especially when falling. Markets in turmoil? If you want to buy or sell a stock because of a media story, wait a few days to ensure it is the correct decision. In addition, write down the reasons why you want to buy or sell an investment.
- Diversify your assets. A balanced portfolio of stocks and bonds, diversified across countries and sectors, and asset classes, allows you to weather financial storms better than concentrated portfolios.
- Keep your costs low. Buying index funds with low fees and avoiding excessive trading can improve your long-term results.
Investing is difficult, but you can improve your odds by following your financial plan, buying low-cost index funds, and extending your time horizon.
We have met the enemy, and he is us. ~ Pogo
September 21, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor.