Warren Buffett said, “Investing is simple, but not easy.” Sounds like a contradiction, but in real life simplicity has little to do with ease. Take losing weight. Very simple. Burn more calories than you take in. Not so easy!
The path to our long-term goals is often filled with conflicting short-term desires. As investors, we want to achieve good returns with minimal fluctuation. We want to maximize return in good times and prevent the chance of loss in the short term. This desire is heightened even more during periods of crisis and uncertainty.
We have the best of intentions. We want to provide for our family and not have to worry about money so our efforts can be on those things that matter most to us. But our emotions can get in the way. Sometimes we make financial decisions that satisfy our short-term emotional urges at a significant long-term cost.
The Cost of Following Urges
Markets can move quickly in both directions. Did you know that over the past 20 years six of the ten best days occurred within two weeks of the ten worst days? Just missing a few days in the market can be very costly.
S&P 500 returns from Jan 1999 – Dec 2018
Fully Invested Entire Time 5.6%
Missed 10 Best Days 2.0%
Missed 20 Best Days -0.3%
Missed 30 Best Days -2.3%
There is a cost to feeling comfortable. Uncertainty and discomfort are the price we pay to achieve greater long-term returns. We may understand this, but it still doesn’t make it easy. We cannot predict the market, but we can counsel together to ensure your decisions are made with the correct perspective and in line with your long-term goals.
Source: JP Morgan, 2019 Guide to Retirement. Page 41.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly.
©2020 The Behavioral Finance Network. Used with permission.