Aspire to be average!

Averages are of course, just averages. Naturally, no one admits to being just average.

Given the following scenario:

1. Due to the U.S. Financial Crisis, the benchmark S&P 500 stock market index dropped about -57% from its peak in 2007 to the depths of despair on March 9, 2009 when the stock market finally bottomed out. Yes, that’s a minus sign in front of the 57. That’s a big drop. Millions of investors capitulated in a fugue of loathing and despair as headlines everywhere predicted the imminent breakup and certain financial collapse of the U.S.A. As usual, the press was completely wrong. The press made the same prediction for the European Union. Wrong again.

2. Fast forward to August 2014 and currently the same S&P 500 benchmark index is up almost 200% from the low on March 9, 2009 (Source:

Given the above numbers, what is your rate of return over that time frame?

The question is actually far more difficult than it seems.

If you panicked during the “Great Panic of 2008 – 2009” you could have sold your index or ETF and crystallized your paper loss of -57% with a real loss. In dollar terms, a $10,000 investment would only be worth $4,300. If you were a do-it-yourself investor, you were waiting of course, for the “all clear” message in order to get back in. Unfortunately, there were no “all clear” messages on the evening news or in the morning papers.

Many investors remain in a fog of uncertainty more than five years after the low point in 2009, and are still in cash. This is changing (has the Great Rotation begun?) as I am seeing some reports of investors piling record amounts of money into stock index funds much to the delight of the Canadian do-it-yourself money magazines. That message sounds suspiciously like the “all clear” message; unfortunately it is almost six years too late!

In the real world though, things are very different. The media believes that buying the cheapest investment products will do the best. Based on real world experiences, I suspect the exact opposite is true – the cheapest investments do the worst. The cheapest investments ( the no-help type) consists of investments that exclude the labour component ( adviser not included!).

Here’s a true story that was very candidly told to me by a doctor (not my client) which I would describe to be as a VHNW (Very High Net Worth) individual. He admitted that he had capitulated during the Panic in 2008 -2009, cashed out and has been in cash for the last five years. No mutual funds, not even a GIC. He couldn’t make the decision to get back in, he said.

The big lesson here of course is not to sell during a big downturn (or even worse, refusing to buy during the big recovery) and it is very true that if you sold or stood aside and watched the big "V" on the chart (the big downturn followed by the big recovery), you might be forced to admit that your returns would be nonexistent, horrendously negative or at best - mediocre.

If the good doctor had even an average mutual fund performing in a very average way, he could be bragging to his colleagues at the next medical convention about his wonderful returns over the past 5 years.

Incredibly, we still see journalists criticizing mutual funds for their professional portfolio management fees not realizing that for many if not all investors, the costs of bad investment decisions at times of emotional distress far outweigh a lifetime of fees. The true drag on investment performance is not the open and transparent fees that one must pay for professional money management but likely the media that abandoned their readers when readers needed them the most. Journalists are at best, fair weather investors.

Millions of do-it-yourself investors panicked and sold out during the Great Panic of 2008 – 2009 likely due to the headlines or the evening news. Today, the Financial Crisis is old news and is largely forgotten. Very few investors admit to making disastrous investment decisions during that perilous time. It is perhaps our human nature that fools us into thinking that it was someone else who was panicking and doing all that selling – certainly not me (probably it was that average investor on the chart!)

That one mistake alone (selling at or close to the bottom) may take a decade or more just to break even.

In my view – one of the most important things that financial advisers do best is expressed by noted behavioral economist Dan Ariely:

"Whatever you do, I think it's clear that the freedom to do whatever we want and change our minds at any point is the shortest path to bad decisions. While limits on our freedom go against our ideology, they are sometimes the best way to guarantee that we will stay on the long-term path we intend." -- Dan Ariely, Professor of Psychology & Behavioral Economics at Duke University


Related articles:

  1. The Great No-help Lie
  2. Value of Advice


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