Investors loaded up on technology stocks in 1999 when the tech sector was all the rage. Investors then sold technology stocks three years later, which was after the market tanked and right as stocks were bottoming out. After recovering from the pain, investors bought stocks again in 2005. That was after we were sure the new bull market was leaving.
After suffering again through a calamitous decline in 2008, investors could not take the volatility and sold stocks at the bottom in 2009. We need to sleep at night, we thought. After so much pain, we kept our long-term investment money in cash for a few years and missed the next seven years of market gains, which continually made newer and higher highs through 2019. Where will the market go from here? I have no idea. But I know the average investor will make bad decisions with his or her hard-earned money and will make them at exactly the wrong times.
The big scary monster that will ruin your retirement account is not the stock market.
It is YOU.
You know your 401(k), IRA, and other retirement account money is long-term investment capital that is meant for your retirement in twenty, thirty, or forty years from now. So why can’t you keep your well-meaning mitts off it, and let it grow on its own? In the twenty-year period of 1993-2013, the S&P 500 averaged a return of about 9 percent a year. But the average investor enjoyed only about a 3 percent annual return over that time.
All the stocks we buy when we are optimistic, all the stocks we sell when we are fearful, all the cash we keep because we are sure the market will continue to decline, all these decisions only conspire to reduce our long-term investment returns to far below where they should be. If we could just keep our hands off our own retirement accounts!
Stocks as long-term investments are not overly risky. Looking at trailing twenty-year periods over the last 125 years reveals that there are no such periods where returns on stocks failed to at least keep up with inflation. Could you have lost money if you only invested for two years? Of course, but history has shown that the longer the investment period in the overall stock market is, the less likely you are to lose money or lag the inflation rate.
Humans are terrible at making active investment decisions. Because of our deep-seated behavioral biases, we continue to make well-meaning, but awful decisions. It is our “fight or flight” instincts that do not serve us well in the investment arena. Humans have evolved over millions of years and we are now able to do amazing things. We grow our own food. We heal the sick. We fight off enemies. We order a pizza on our phone. We live to be a hundred. But investing in stocks is a relatively new challenge to our human condition, and we have not developed or evolved the behavioral intelligence to do it well, and we probably won’t anytime soon.
Fidelity Investments, one of the largest asset management firms in the world, performed an internal analysis of which of their retirement accounts saw the best returns over time. They were shocked to learn that the best performing accounts shared one trait: these were accounts that their owners forgot they had! Therefore, there were no active decisions made, just steady, uninterrupted compounding of market returns over time. Decisions were not made that most likely would have been fear-based and ill-timed, decisions that would have made long-term performance decrease over time.
But hey, you are not alone. Fortunately, you don’t need an advanced degree to grow your savings into a comfortable retirement. You have all the skills you need right now. That is, you do if you can avoid being your own worst enemy. You just need to invest early, invest consistently, and set it and forget it. It’s that simple.
Don’t watch financial television. Don’t read stories about “the coming crash” or “the coming boom.” Don’t sell stocks or mutual funds because you are worried about the election, the national debt, the price of gold, or because you want to buy bitcoins. You don’t know what the future will bring. Nobody does. And if you trade your hard-earned retirement money based on fear or optimism, then you will most likely be making a mistake. Just make regular and meaningful contributions to your retirement accounts, invest the funds immediately into high-quality managed investment products, low-cost stock index funds or ETFs, and walk away. Look at your account statements quarterly or annually and then live your life.
Your long-term retirement is safe. Unless, of course, you mess it up.
