By Jason Oshins, Financial Advisor, MBA

I’m a Yankees fan.  A proud one at that.  The Yankees have had measured success over the long term.  My favorite team of all time is the team that won the World Series in 1998.  They set a record for most games won that year—they won 114 games.  Do you also know what happened?  They lost 48 games!  Thirty percent of their games!  That’s a lot of games to lose… unless you view it within the context of how many they won.

The market has experienced extreme volatility.  Sure, it doesn’t feel good, but it’s not shocking.  This is what markets do – they go up, and they go down; and the movement isn’t linear.  This is the essence of volatility, and through it investors capture returns.  Fortunately, the market goes up more – a whole lot more – than it goes down.  In fact, when we assess the performance of the S&P 500 from 1926 to 2016¹, we see that nearly three quarters of the years have provided positive returns.  Moreover, the average return over these 67 positive years is 21.11%, overwhelming the average of -13.61% during the 24 negative years.  Further, the average return over this 91-year period is 11.95%.  Think about that.  If you could head to Las Vegas and get those odds, would you?

We have an opportunity to approach investing from a scientific and academic perspective and, essentially, apply evidence-based medicine principles to the investment world.  This entails owning equities, diversifying globally, rebalancing, and remaining disciplined.  It involves no stock picking and no market timing.  Rebalancing, which is the process of regaining the pre-determined mix of asset classes, facilitates the Holy Grail of investing: buying low and selling high.  After all, based on their relative performance over time, asset classes drift, resulting in either over or under representation.  This compromises the integrity of the portfolio.  Having a mechanism for rebalancing built into the process facilitates selling high and buying low.

We are human, and we have emotions.  When something feels good, we want more.  And when something doesn’t feel good, we avoid it.  Furthermore, we watch TV, read magazines and newspapers, and engage in conversations.  These can create anxiety, which, in turn, can result in destructive behavior.  The problem isn’t the market decline.  The problem is how we – emotional humans – react to it.  Those who panic perpetuate the pain; and those who remain disciplined, who rebalance their portfolio, rightfully reap the rewards.  This is an opportunity for us as advisors to demonstrate leadership and manage our client’s behavior so they remain disciplined.

According to DALBAR², an independent group that conducts research on market performance, this human element wreaks havoc on investor performance.   Each year, DALBAR publishes the “Quantitative Analysis of Investor Behavior”, which studies actual – not hypothetical – investor returns.  In its most recent study, published in 2017, it shows that the average equity mutual fund investor’s return over the past 30 years was 3.98%, substantially under-performing the market.  The S&P 500, for context, provided a return of 10.16% during this same time period.

Investing is done for the long term.  Perspective is critical.  So, unless something has changed in your client’s life, then this is an opportunity to coach them to remain disciplined and to rebalance their portfolio, applying the principles endorsed by Nobel Laureates. 

CITATIONS:

[1] Matson Money, “Gearing Up For the Crash”. Historical stock market information is derived from returns software created by Dimensional Fund Advisors LP (DFA) as updated through Dec. 2016.  DFA is a registered investment adviser that, among other things, specializes in and sells statistical market research and mutual fund management. DFA obtains some of its market data from the Center for Research & Security Pricing (CRSP), part of the University of Chicago’s Booth School of Business (Chicago Booth).

[2] DALBAR, Inc. is “the financial community’s leading independent expert for evaluation, auditing, and rating business practices, customer performance, produce quality, and service”.  Each year, DALBAR publishes the “Quantitative Analysis of Investor Behavior”, a study of actual investor returns.

ABOUT THE AUTHOR

Jason Oshins is a Financial Advisor with WestPac Wealth Partners. He works closely with clients throughout the country to increase wealth during lifetime, improve income during retirement, and provide a greater legacy upon passing, while also insulating them against life events, taxes, inflation, and market volatility. He specializes in the areas of estate planning, investments, retirement planning, insurance planning and design, disability protection, long-term care, wealth transfer, and business planning. Jason obtained his MBA from the University of Michigan in Ann Arbor.  He can be reached at (702) 470-2753 or by e-mail at jason.oshins@thewp2.com.

S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. Indices are unmanaged and one cannot invest directly in an index.  Past performance is not a guarantee of future results.

This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 6455 S. Yosemite Street, Suite 300, Greenwood Village, CO 80111, 303-770-9020. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. Wealth Strategies Group is not an affiliate or subsidiary of PAS.

Guardian, its subsidiaries, agents, or employees do not provide legal or tax advice. Please consult with your attorney, accountant, and/or tax advisor for advice concerning your particular circumstances.

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