Global Chaos and Investing
If you turn on the evening news, it seems that there is plenty to worry about these days. The topics range from the latest inflation reading of 8.5%, which is the highest number in over 40 years, to the war in Ukraine, supply chain disruptions and a Federal Reserve raising interest rates. This is just the tip of the iceberg. As I write this blog, there is news of a mass shooting in a New York City subway and China locking down major cities to combat another covid outbreak.
Guess what else is about to hit us? Yep, mid-term election advertisements that everybody loves so much.
Add all of this up and the cherry on top appears to be a very wobbly stock market. As of the close of market yesterday, April 13, 2022, the S&P 500 and Dow Jones Industrial Average are down 5.46% and 5.49% respectively for the year The NASDAQ is faring even worse with a negative 13.76% year to date return and small company stocks, as measured by the iShares S&P Small-Cap ETF (symbol; IJR) is down 7.22% (per marketwatch.com).
Many investors are wondering what to make of the global chaos and how it impacts their investments.
As we see it, the problem lies not in how the markets respond to global worries, but whether your investment allocation is set properly. What we mean by this is, when the market is going up, investors tend to chase that performance by increasing their allocation to stocks and, thereby, increasing their future volatility. Then, when the market exhibits downside volatility, these same people are inclined to sell.
A big part of long-term investment success is hinged, not on stock market performance, but on investor behavior. As is true in most aspects of life, good behavior usually leads to good results while bad behavior leads to bad results.
Unfortunately, individual investors have a bad track record when it comes to good behavior with their investments. If you look at the graph below, it shows that the average stock investor has underperformed the stock market over the last 30 years. This means that, rather than investing and staying the course for 30 years, which would have been good behavior, most investors chase performance and change allocations so often that they miss the positive moves that lead to great long performance.
As you can see below the penalty for poor behavior can be huge. Over the last 32 years, behavioral issues cost the average stock investor 3.52% per year.
This is where qualified and experienced financial advisors can add tremendous value through what is called “behavioral coaching”.
Working with an advisor through the planning process should help your properly allocate your investments so that they are in line with your risk tolerance, risk capacity, temperament, and long-term goals. Working with a good advisor from there should help guide you and your behavior toward sticking with this plan and portfolio, even when times get tough.
The goal is an investment portfolio that gives you confidence and requires very little tweaking during market disruptions. In other words, our job is to build an investment portfolio that helps you worry less and enjoy life more.
If you’re not there, perhaps it’s time for us to have a conversation.