If you have decided to take a few minutes and read this article, I think it’s fair to assume that you are aware COVID-19 has sent shockwaves across the global economy. People are facing layoffs, personal loss, unexpected expenses, and periods of extreme volatility in the stock market. In today’s world, most people would agree that we are all “victims of information” and there is no shortage of opinions out there – whether you think they are good, bad or indifferent.
This post isn’t meant to be motivational; it is meant to provide perspective through a challenging time. In my opinion, life is 10% what happens to you and 90% how you react to it. One could say that this concept could also apply to your financial planning and investment process.
A study by DALBAR underscores the importance of controlling emotions and avoiding self-destructive investor behavior. From 1997-2016, the S&P 500 returned 7.68% annually, while the average stock fund investor earned only 4.79%. We call the difference between these results the “Behavior Gap”.
Why have many investors historically sacrificed so much of their potential return? Driven by emotions like fear and greed, they succumbed to negative behaviors such as:
- Pouring money into the latest top-performing manager or asset class, expecting the winning streak to continue,
- Avoiding areas of the market that have performed poorly, assuming recovery will never occur, and
- Abandoning their investment plan and attempting to successfully time the market top or bottom, a near impossible feat. Studies have shown that missing just a few of the best days in the market can have a detrimental impact to your return.
Successful investors throughout history have understood that managing long-term wealth requires the ability to control emotions and avoid self-destructive investor behavior.
Choosing someone to work with can be difficult and we understand that. Here at Confluence Financial Partners, you will receive professional advice from our team that is customized to meet your financial goals and to help you navigate through tough times.
Please don’t hesitate to reach out to us if you would like to discuss further!