As summer wanes and we power towards Labor Day we’re left with a couple of realities:
- the days are hot
- the news cycle is slow
Hot days find us seeking A/C and a cool drink. Slow news cycles make us overreact as the insignificant suddenly seems anything but.
Lately we’ve been bombarded with the usual. The details are different but the manufactured panic is the same. The Fed, North Korea, President Trump, etc.
How will the typical investor respond to “market-moving” activity (and should these things really move day-to-day prices)? If history is a guide then while markets continue to do well investors will continue to do poorly.
The Dalbar Quantitative Analysis Of Investor Behavior looked at annualized performance from 1995 – 2014. The S&P 500 returned 8.2%. Long-dated U.S. Treasury bonds earned 7.0%. Investment-grade U.S. corporate bonds came in at 5.8%. The average U.S. investor? A whopping 2.5%.
Why the disconnect? Trading . . . and emotional trading at that.
What does this underperformance look like in dollar terms?
Full investment over the term of the study (1995 – 2014) would have turned a hypothetical $10,000 into $40,329. An investor spooked by headlines would have sold at the lows and sat out the recovery. Here’s how s/he would have faired:
- missing the 10 best days would have meant turning $10,000 into $20,142
- missing the 20 best days would have meant turning $10,000 into $12,558
What if s/he had sat out even longer? Gains would have become losses.
- missing the 40 best days would have meant turning $10,000 into $5,644
- missing the 60 best days would have meant turning $10,000 into $2,811
The lesson is not to remain fully invested. There’s always a place for cash in a portfolio. Rather, the lesson is twofold:
- making investment decisions based upon emotional reactions to “news” is a loser’s game
- no one can time the market so trading based upon perceived “tops” and “bottoms” will only exacerbate the problem