As stocks in the U.S. and overseas continue to rise, the Dow Jones Industrial Average closes in on 26,000, and talk of inflation resurfaces, some investors are beginning to get very, very nervous.
You’d think it would be easy being an investor over the last nine years, when the Dow Jones Industrial average began its climb from 6,000 to where it is today. But good fortune can be as unnerving as loss.
In 2007 as the U.S. stock market began its fall and the rest of the world followed, many investors bailed out when they reached their own point of “I can’t take it anymore!” Some told their friends they got out before the fall, while others admitted they didn’t get out soon enough, but at least they knew they weren’t going to lose more. Investors who needed to save for college, retirement and other goals now faced an even tougher question – when to get back in. The same fear that forced them out of stocks made it difficult to get back in the market until it ‘felt right.’ Unfortunately, by the time they felt the recovery was real the most significant stock gains had already passed them by, as Chip pointed out in his blog last year.
Equally disappointing, many investors who were in the stock market as it climbed got out early and missed significant gains.
According to a recent WSJ article, fund-tracking firm EPFR Global reported nearly $1 trillion dollars have been pulled from retail mutual funds that target U.S. stocks since the start of 2012. Over this time the S&P 500 climbed another 116%, and the Dow Jones and Nasdaq indexes rose to all-time highs. Which means during one of the greatest 5-year runs for the U.S. stock market, many investors didn’t participate.
We make successful investing much harder than it needs to be.
Looking for shelter from stock market losses, we buy index annuities with the promise of consistent positive returns. But those returns come with confusing contractual clauses, high fees and expenses that erode gains, and surrender charges that wipe out what little we’ve made when we try to exit.
We’re tempted by hedge funds – sold as exclusive investment opportunities promising to out-perform boring, conventional investments and ‘hedge’ against potential market losses. Their customary charges of ‘2 and 20,’ or 2% a year in fees plus a 20% share in client profits, landed many hedge fund managers in the Mansion section of the Wall Street Journal, but few investors shared in their success.
Warren Buffett won a 10-year bet against hedge funds in December. In 2007, when many hedge fund managers argued they could out-perform the S&P 500, Mr. Buffett made a million-dollar bet that the S&P 500 would beat a group of hedge funds selected by Protégé Partners. By January 2016 the S&P 500 had returned 7.1% per year compounded annually, while the basket of hedge funds returned an average of 2.2% over the same period. The gap only widened in 2017, and Buffet’s investment winnings of $2.22 million were gifted to his chosen charity, Girls, Inc. last week.
Intellectually, we know investing is a long-term project. Even retirees face 20 to 40+ years of relying on their investments for growth and income. We’ve all read and understand that being invested in a variety of companies of different sizes and home countries is a sound way to grow our net worth, accomplish our goals and keep us secure. But when the stock market experiences years of losses, investment products making promises we want to believe pull us in, and after nine years of positive returns in the U.S., new market highs are making investors nervous now.
Today’s temptation to remove ourselves from the market before the inevitable drop is strong. But when will the correction occur? Will it be in one year, five years, or longer? Will it be a broad correction, or limited to only a portion of the market, like technology companies? We know a correction will eventually come, but the timing and breadth is never certain. Having a plan can replace that anxiety.
Deciding what you want out of life, what you want to accomplish, and building a portfolio to finance it gives you much greater security and confidence. Holding a variety of stock and bond investments over a broad spectrum of countries, market capitalization and industries defends you against market turmoil, as there is there is always something doing well when it feels like the world is collapsing.
A plan, combined with an investment discipline, gives us a path to follow in both up and down markets. The difficult part is creating a plan. You have to stop, reflect, think about what’s important to you and what you want to accomplish. You have to commit to something. But once you have a plan, the rest comes much easier. Second-guessing the direction of the economy and the markets is no longer necessary.
Investing is hard, but not for the reasons you might think. Are you ready to stop being your own worst enemy?