Our family is thoroughly enjoying watching the Olympics especially with the strong showing by the United States teams. To watch all of these worldwide athletes perform at such high level is a thrill especially if you have ever attempted to play any of the sports that were competing this summer in London. I often respond when people ask me if I play tennis – “I do but not that tennis. That is a game that I am not familiar with.” Same goes for the soon to be Olympic sport golf.
And while all of these athletes have been gifted with God-given ability, all of them have had to be disciplined and patient as they continued to develop and accelerate at their chosen sport. The numerous laps in the pool by Michael Phillips and Missy Franklin, the miles of running by Galen Rupp, and the countless hours in the gym by Gabby Douglas all resulted in the performances that were given at the critical moments in London. These athletes, as they went through their training regimens, had to stay disciplined and patient that the work would ultimately result in reaching the goals they had set for themselves. All of them had to endure difficult times, but they stayed disciplined and patient knowing if they stuck with the plan they would be able to achieve great results. During the difficult times, this is when their gifted coaches are most critical to maintaining their focus.
These are two of the principles that we adhere to at Crimmins Wealth Management: patience and discipline. These two attributes are critical to investors to keep a long-term investment plan in place. Because at times, the markets will have you question if you should abandon the plan. This is why we coach our clients to understand that the best approach is to stay disciplined and patient and rely, not on what is working at the moment, but what has always worked with regards to investments.
A study by the research organization Dalbar found that from 1992 – 2011, the average investor did substantially worse than major indices. Sometimes, we really can be our own worst enemies. Up and down markets can be emotional events, but as the study found, letting emotion affect your investing can be very damaging. The lack of patience and discipline by investors is very costly.
In this study, the average investor returns were calculated as the change in assets after excluding sales, redemptions and exchanges during the period. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses, and any other costs.
According to this study, the average equity investor had annual returns of just 3.5% during this time frame. Over the same period, the S&P 500 returned an annual average of 7.8%. This almost 55% decrease in average annual returns experienced by the average investor is the cost of not exercising patience and discipline, of letting emotion guide investing instead of reason.
Even in fixed income, investors made expensive mistakes. While the Barclay’s Aggregate Bond Index returned 6.5% over this period, the average fixed income investor had an annual return of 0.94%, underperforming even inflation.
This underperformance is frequently called “the behavioral gap”. Just as the Olympic athlete coaches continue to work with their respective athletes to make sure they maintain their disciplined and patient approach, that is what we do at Crimmins Wealth Management and frequently describe ourselves as financial coaches. Isn’t it time to get your own financial coach?