From what you heard on news you might think the stock market had a horrible first quarter. With 3 individual trading days that had very large drops, that seemed to be the big news in the stock market. But in reality the market didn’t really do too bad in the first quarter. The following is an excerpt from the Matson Money quarterly statement.
“The 1st quarter of 2018 saw a reversal in course in broad equity markets, with both domestic and international equities declining. U.S. stocks fell by 0.76% as represented by the S&P 500 index, while international stocks also weakened, with the MSCI World Ex-USA Index declining 2.04% for the quarter. In unusual fashion, fixed income also finished mostly negative over the quarter. As a result of increasing interest rates, the Bloomberg Barclays U.S. Intermediate Government/Credit Bond Index lost 0.98%.
In the previous quarterly letter, we mentioned how the S&P 500 Index was on a run of 14 consecutive positive quarters. It was noted that although this can give investors a euphoric feeling, it can be dangerous because it can lure them into believing that volatility and downside risk are no longer a reality in equity investing. Stephen King has a succinct yet profound quote in the book The Colorado Kid that states “Sooner or later, everything old is new again”
This quote is applicable in many disciplines, but can be especially useful when applied to investing. When returns are negative, it can feel like they will never turn around. Conversely, in times where returns have been positive for an extended period, it can feel like they’ll go up forever. But inevitably, downward volatility will return to the market, and periods of negative returns will show up again. This is what we have experienced over this past quarter, downward volatility returned, equity returns turned negative. What was old is new again.
Why is this an important concept to remember? Because so many investors react on emotion to what is occurring in the present moment, which can undermine their long-term investing success as a result. Each year Dalbar Inc. puts out a comprehensive study titled “2018 QAIB Report” which looks at the individual investor return of all mutual fund investors in the U.S. In this study, they show that the average equity fund investor only received an annualized average return of 5.29% over the 20-year period ending 12/2017, compared to 7.20% for the S&P 500 Index. One of the main contributors to their underperformance is the fact that the average investor had a retention rate of only 4.03 years. What this means is that every 4 years they decided to change the course of their current investment strategy and go in a different direction.
One can surmise that many of these investment changes result from an emotional reaction to the current market conditions. While the difference between 7.20% and 5.29% may not seem that large, over that 20-year period, the average investor would have received over $120,000 LESS than the S&P 500 on a $100,000 initial investment.
We know the historically these cycles of volatility come and go, and that bear markets follow bull markets and vice versa. But over long periods of time, if an investor remained disciplined and consistent with their investment philosophy, they could have been rewarded with generous market returns. The ability to ignore the noise and keep a long-term focus is an extremely important component for an investor, and as the Dalbar data reveals, can also be extremely difficult.
In the end, choosing a wise financial strategy – and sticking to it – can have tremendous impact on an investor’s long term financial health. Chasing performance through buying and selling is a risky game. Historically speaking, it will only reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions can help an investor bridge that gap between what the average investor makes and the return of the market.”
References
- Matson Money. “Account Statement.” Letter to James Hancock. 15 Apr. 2018. MS.