Statistics from Seeking Alpha show that the S&P 500 has had average returns 10.67% annualized since the inception of its modern structure in 1957. Warren Buffet recommends putting your money into an index fund and not touching it. So why doesn’t everybody have successful investment results? The reason that people may have trouble in their investing efforts is the same reason people have struggled at anything, they can’t get out of their own way. Emotions play a large part in every decision we make, and this is especially so when it comes to our money. Fear and greed are the two most prevalent factors that affect our decisions about money, and both can take you down.
What the Seeking Alpha statistic fails to demonstrate is that, within the average return number, there lie many peaks and valleys. We’ve all seen the huge bull market with returns of 78% from Jan 2018 to Dec 2021. In contrast we’ve seen the 40% drop in 2008, the 25% drop during COVID and, most recently, the 25% drop in 2022. These extremes play on peoples’ emotions and lead to bad decisions, often causing people to zig when they should’ve zagged.
In addition to the emotions there is timing. As the saying goes “timing is everything”. When it comes to constructing a financial income strategy from your savings, timing may be more important than returns. Regardless of portfolio size, the largest fear expressed to me by clients is the fear that they will run out of money prematurely. This is the fundamental fear that I see lead to greed (taking too much risk) and analysis paralysis (taking too little risk). The fear of running out of money can cause people to chase unrealistic gains so they will “have more than enough” for their future. Conversely, the fear of running out of money can cause people to hoard their money so they will “have it if I need it”.
Financial advice is about managing emotions, risk, and expectations. The first job of a financial advisor is to help a client define their situation, their long-term financial needs, and their emotional relationship with risk. Once defined, an advisor helps the client set reasonable expectations and establishes a strategy using vehicles that help mitigate the fears of the individual.
We believe the greatest fear is the fear of the unknown. A financial advisor should strive to eliminate that by quantifying future financial needs, constructing a path to help fulfill those needs and walk with the client along the way. A good financial advisor will provide a client with confidence in their future and be there as fears, emotions and unexpected life events threaten that confidence.
This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.
There are retirement account risks that could diminish investor returns, such as, but not limited to: low interest rates, market volatility, withdrawal timing and sequence of returns risk, government policy uncertainty and increased longevity. Prospective investors should perform their own due diligence carefully and review the “Risk Factors” section of any prospectus, private placement memorandum or offering circular before considering any investment.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA / SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA). Thornwood Financial is independent of CIS, CAM and CIA.
