Remain Steadfast in a Storm

If you read the Money & Markets section of the Wednesday (May 27, 2009) Oregonian, you may have noticed a little article titled “The steady investors wins.” The article briefly describes how most investors realize investment returns that are substantially below those that the market itself produces. This should be a big wake up call for investors who continue to believe that they can “beat the market” through strategies like timing when to get in and out of the market, selecting “hot” mutual funds or relying an advisor to pick “winning” stocks. These strategies consistently result in poor performance.

In the scenario offered in The Oregonian the slow and steady investor put $10,000 in a S&P 500 Index fund and did nothing more. She simply let the money grow. At the end of 20 years, the account has grown to $49,725 based on the 8.35% return of the index.

The other investor is described as “squirrelly.” He also starts with $10,000. But instead of investing and holding steady, he attempts to improve his performance by moving in and out of the stock market. Twenty years later this investor ends up with $14,485 or a 1.87% return. This is the result earned on average by investors in stock mutual funds for period 1988-2008 according to Dalbar, a research company.

The difference in the two results is over $35,000. This is enough money to pay for a year at a private college, a brand new car, or the down payment on a place at the beach. If the starting value had been $150,000, then the cumulative difference would have been over a $500,000.

Intelligent investors are smart. They know they cannot “beat” the market. So, they make no such effort. Instead they build well diversified portfolios, minimize their investment costs. Intelligent investors are also disciplined. They know how to manage their emotions during the most difficult periods in the stock market. They simply wait patiently for the storm to pass. They know the market will eventually reward them for maintaining remaining vigilant.