The Dangers of Letting Emotion into Your Portfolio

Well, happy Friday. Hope you're doing well. In this quick Finance Friday video, I want to talk about the dangers of being emotional as it relates to your investment portfolio. So, let's just jump right into it. I want to give you some numbers and talk about the value of sticking to your long-term strategy rather than responding emotionally to short-term fluctuations in the market. So, let's jump into it.

So, one of the values a wealth manager can provide is helping you stick to your long-term strategy. What we find when we look at data in terms of the average return an investor gets versus what the market return was, (theoretically, what the return that they should've gotten was) we find that the average return is less than what they should have gotten. And it's generally speaking because of emotional responses. So, they'll hear something in the news, they'll hear the word recession, and they'll get out of the markets and they'll miss a few of the good days in the markets that they wanted to be invested for. So, sticking to your long-term strategy is very important.

There's actually a group that quantifies this number and what the average level of underperformance is. It's called the DALBAR Institute, and they take a look the flows into and out of mutual funds that are sort of like the S&P 500, and then they look at the return of the actual S&P 500. And they say, "How did, given those flows into and out, how did the investor do on average?"

So if you look at 2020, there was actually a pretty sharp bear market there, pretty quickly because of COVID. The average investor got 17.09%. The S&P 500 gave 18.4%. So, underperformance of -1.31%.  If you're paying 1% for an advisor and they're helping you avoid that decision, immediately, they're worth it and then an additional 31 basis points. But generally speaking, it's a bigger number than that.

If we look at 2021, the S&P 500 return was 28.71%. The average investor got 18.39%. So, somewhere around 10 percentage points, 10% less performance than what the market should've given them had they just stuck to their strategy and remained invested. So, long story short, try not to be emotional as it relates to investing, assuming you have the right portfolio to begin with. Because those emotions and trying to time the market, and as obvious as it might seem that it's a good time to get out or a good time to get in, studies suggest that people still aren't good at it. So, stick to that strategy over long-term timeframes. That's how we think you find success in the stock market.

Have a great Friday. If you have any questions, feel free to reach out. We're here for you and we'll talk to you soon.