Quarterly Thoughts – Q2 2012
Are you in the panic group or the profit group? Often times, the discomfort of sea or motion sickness can be avoided or reduced by keeping one’s eyes on the horizon. Similarly, keeping a long-term focus can reduce “emotion sickness” of the investor kind. Anticipating and managing such discomfort is paramount, because an investor’s ability to focus on the goal rather than on short-term disturbances can impact the timing and success of arrival to the destination.
A recent study by Fidelity showed that account balances of disciplined investors grew 62% more than those that felt “investor emotion sickness,” panicked and “jumped ship”. As such, it is invaluable to develop healthy investor behavior patterns, through education, balanced (i.e. non-hyped) information and objective, effective guidance.
The study evaluated investor results during the heart of the recent global financial crisis (9/30/08 to 6/30/11), by grouping people by behavior and then calculating account balances. The difference is stark:
• 2% = Panic Group: Account balance increase of those who panicked, eliminated stock exposure and stopped contributing to their accounts.
• 64% = Profit Group: Account balance increase of investors who stayed the course, did not modify their asset allocations and continued to contribute to their accounts.
• 62% = Difference, or benefit of disciplined investing (or, conversely, damage from emotional investing)… or conversely, the “opportunity cost” of those that panicked.
Interestingly, 62% is greater than the 55% drop, approximately, of the US stock market (S&P 500 Index) from peak to trough during the global financial crisis. Emotions can be more costly than the markets.
So, the next time markets are difficult, ask yourself if you want to splash or sail – do you want to be part of the “panic group” or “profit group”? Sticking with your plan is not a sign of weakness or a poor default course of action, but rather is an active and goal-oriented decision that requires effort and dedication. You can do it!