The Loss You'll Never See...
Submitted by Waterstone Wealth Advisors, LLC on February 15th, 2016There are times when being, and staying, invested in anything is hard. There is a reason a portfolio of stocks and bonds or stock and bond funds is called an investment portfolio. You have to be and stay invested in it to reap the rewards. These rewards can be many: a comfortable retirement, college for your children or grandchildren, care free time spent with loved ones, sleeping well at night knowing you have the means to provide for those you care about. There are as many possible rewards as there are disciplined investors; absent luck there are many fewer, or no, rewards in any endeavor of the undisciplined.
With the significant volatility in the global markets over the past few weeks the most important question to revisit is “Why are we investing in the first place?” Over the course of our lifetime "Wouldn’t it be better to just put all of our hard earned money in a bank savings account?" It’s good periodically ask these questions and look at some answers based on historical facts rather than current emotions. First some facts:
In the 20 years through the end of 2014 the average annualized return for the S&P 500 stock index was 9.85% per year. Impressive when considering during that time period we had a scandal-ridden stock market meltdown in 2000 thought 2002 (remember Enron and MCI?), two overseas wars, and yet another scandal-ridden global financial meltdown in 2008 through 2009 (remember Washington Mutual, Wachovia and Countrywide Mortgage?). And that’s just what was going on in the US. According to Dalbar Inc. ( a leading independent expert firm for evaluating, auditing and rating business practices, customer performance, and product quality and service) the average equity fund investor return during this same time period was 5.19% per year. This was due primarily to investor misbehavior and not market misbehavior. This significant gap in the accumulation of wealth on the part of retail investors is significant: if you invested $10,000 in the S&P 500 at the beginning of 1995 and did nothing for 20 years through the end of 2014 the value of your investment grew as follows:
January 1995 to December 2014 | Average Annual Returns | Value At The End of 20 Years |
---|---|---|
Invested in the S&P 500 | 9.85% | $65,463 |
Average equity mutual fund investor | 5.19% | $27,510 |
The Loss You'll Never See | $37,953 or a "Loss" of 58% | |
Average Money Market | 2% | $14,859 |
The Loss You'll Never See | $50,604 or a "Loss" of 77% |
Dalbar states “Investor results are more dependent on investor behavior than on fund performance.”
Now back to our original questions:
“Why are we investing in the first place?” – for the rewards mentioned above plus all of the other rewards which can be defined by each disciplined investor. The “Loss” referred to in the above table is a real loss but one that the average investor will never see. How would one quantify 58% (or 77%) less comfort in retirement or 58% less care free time or 58% less of doing what you want when you want? These losses are very real but not very tangible until it is too late to have a “do over”.
Any endeavor worth your time is worth doing well. Life is a short, beautiful endeavor and there are no “do overs”. You cannot predict the future but you can prepare for it.