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R. Scott Maxwell, MBA

Your actions today will affect you tomorrow.

If you are like many investors during this difficult market stretch, you want to run for the sidelines (if you haven’t already done so) and eliminate the potential for any more declines in your net worth.

The news of the day sounds so awful. Your account value has shrunk. MSNBC and CNBC analysts keep talking about “the next great economic depression” and how we may be in the midst of a protracted market meltdown that rivals 1929. The President of the United States told us our entire economy is in danger and we are on the precipice of a long and painful recession.

Those sidelines look better and better, don’t they?

Sure they do. Sitting on them also virtually guarantees you will underperform the market over the long run.

How could that be, you say? How in the world could avoiding today’s pain and then swiftly moving back into the market when “things get better” be the wrong thing to do?

Because that is exactly how the market works.

Consider these finding from the independent market research firm DALBAR, Inc:

1. Over the 20 years ended December 31, 2007, the average equity fund investor earned an average of just 4.48% per year, compared with 11.81% for the S&P 500
2. Over the same time period, the average bond fund investor actually lost 1.49% in purchasing power each year.
3. Investors who pursued a systematic, buy-and-hold strategy could have improved their performance results by 50% or more over 20 years.

Let those numbers sink in for a moment. The average investor punted away 7.33% of annualized returns because of their behavior in good times and in bad times over the past 20 years. Losing 7.33% of potential annualized return means the average investor starting out with $100,000 on January 1, 1988 let over $411,500 slip through their fingers.

They let it slip through their fingers because they listened to the “crisis” news of the day and moved out of the market in “bad times” and back into the market in “good times”.

They let it slip though their fingers because they tried to pick “hot” stocks or the “best” mutual funds based on past performance.

Because they paid punitive annual fees to hear a commission driven sales pitch from their stock broker or insurance agent cloaked as advice.

Because they were sold Class A mutual fund shares that skimmed away up to 5.75% of every dollar invested in them or bought actively managed funds with their high expense ratios that sabotage returns.

Because they succumbed to their inner voice telling them to abandon risk management or global diversification because the good times would last forever or the bad times would never end.

I do not pretend to know when the markets will recover or how much lower they may go. Selling everything you own and sitting on the sidelines for a week, or a month, or a year (or more) may prove to be the ideal short-term strategy once we have the clarity of hindsight to reflect upon.

Fortunately, that exact same rear-view mirror offers you a very important long-term lesson about the rewards of patience that completely contradicts your emotional response to bad news.

History brings clarity and promotes perspective. 20 years of hindsight teaches us there is a better way if we are willing to head the lesson.

Ask yourself two questions today (do it now, this is important):

1. Do I need this money today?
2. Is my investment strategy based on seven decades of evidence-based modern economic theory or have I bought into Wall Street’s stock picking, market timing, return chasing, product centered marketing machine?

If you do need it today, meaning you need to withdraw it for living expenses or emergencies, then you must immediately analyze your investments to ensure you have the appropriate level or risk to match your time horizon. Equity market risk is for the long-run. A five year time horizon is our rule of thumb to define long-term.

If you don’t need it today, then do your best to manage your inner voice of worry and keep your eye on the horizon. Make it your personal mission to separate yourself from the flawed and maddening crowd that DALBAR annually exposes.

Your answer to the second question is equally important. The long-term view is meaningless to anyone invested in Lehman Brothers, Bear Stearns, Washington Mutual, Freddie Mac, Fannie Mae, AIG or any number of other past or future companies to inflict unrecoverable losses on their investors. The market offers wonderful long-term rewards to the properly diversified and patient investor. Chasing returns, picking stocks, timing markets and buying into the commission driven sales machine of the brokerage and insurance worlds are a recipe for underperformance, if not total disaster.

Embrace the fact you cannot predict how markets will behave at any given time. Diversify your portfolio now. Match the return objectives of your investments to your personal comfort level and account for times like these. Make sure you have an elegantly designed portfolio built to weather the inevitable storms of the market while offering real opportunity for growth.

And always remember your success is rooted in your commitment to be there when the next upcycle begins.

Not everyone can win at the inner game of investing. It is hard for the average person to ignore the noise of the moment and the worries of the day. It is hard for the average person to remain committed to a properly diversified, low-cost, asset class portfolio methodology when so many competing voices seek to lead them astray. DALBAR reminds us every year just how hard things can be when you decide to follow the herd.

The evidence is clear. A trusted advisor will keep you on track. The rules of investing have not changed. Markets still work. Risk and reward are still related. Diversification remains paramount. Portfolio design is essential. Performance is the fruit of patience. Inner peace is Peaceful Wealth.

R. Scott Maxwell, MBA is a Vice President and a wealth and income solutions expert at Talis Advisors, a wealth management firm headquartered in Plano, Texas. Awarded the prestigious 2009 Five Star Wealth Manager: Best in Client Satisfaction for the Dallas/Ft. Worth area by Texas Monthly magazine, Scott is committed to teaching investors the truth about the stock market and how they can achieve Peaceful Wealth throughout their lives. Scott can be reached at 972-378-1794 or 866-608-2547 or via his web site at http://www.talisadvisors.com

This entry was posted on Thursday, June 4th, 2009 at 10:36 am and is filed under Peaceful Wealth Essays. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.