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What’s the Most Important Thing in Investment Returns?

What’s the Most Important Thing in Investment Returns?

September 16, 2023

The Dominant Force in Investment Results: Your Behavior

The one thing to has the most effect on your investment results is . . .   your behavior. Regular readers will remember that I recently added the Behavioral Financial Advisor designation to my resume. I did this work because I have learned in my more than 20 years in this business how important it is to help families make good choices about important financial matters.

According to consulting firm Think to Perform, 87% of investment returns is directly related to investor behavior with the remaining 13% coming from asset allocation and individual investment securities selection. So, it’s A LOT more important to commit to saving an extra 10% into your Roth 401k than to debate whether an S&P 500 index fund is aggressive enough for your needs.

Bridging the Behavior Gap: Staying Resilient Amid Market Volatility

And, research has shown that there is a GAP between the performance of investment INDEXES and the returns that ordinary investors get. I like Carl Richards’ term for this, the Behavior Gap. Investment research firm DALBAR does an annual study of the Behavior Gap. As of year-end 2022 here is the 30-year data.

30 Year Annual Average Return

The 30-year Behavior Gap between stock fund investors and the S&P 500 stock market index is 2.84% each year.

Stocks Since the great depression

The S&P 500 index has averaged 9.138% per year with dividends reinvested over the last 150 years. History shows that investing in U.S. stocks is one of the most consistent ways to build wealth available.

But the challenge is to stay well-behaved during challenging times. U.S. stocks tend to move up and down in price a lot. History shows that we will have about 3 times each year when the market pulls back from recent highs by 5% or more. On average, we see a decline of 13.25% each year.

Total return and pullback

Since 1988:

  • Average Annual Total Return: 12%
  • Average Intra-Year Decline: 13.25%
  • 81% of years are Positive.
  • 19% of years are Negative.

To get the 12% per year average return, you need to grit your teeth when you hit the temporary down point of 13.25% and do NOTHING. If you can be brave enough to stay invested, you will be rewarded. This is VERY HARD. That’s why having the help of an experienced Behavioral Financial Advisor can be so valuable.

I am an experienced, highly-trained, CERTIFIED FINANCIAL PLANNER™ professional and Behavioral Financial Advisor. I am a financial planner who is an advocate for my clients ALL THE TIME – a fiduciary financial planner. I provide guidance based on clients’ best interests, not commissions or sales quotas. I think it’s the best way to serve clients and I am thrilled to work this way all the time.

If you would like to talk about your situation, I love to meet new people. So, follow this LINK to find a time for us to have a get-acquainted visit.

And yes, I’m still taking on a few great families to be part of my financial planning practice.

Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.