Have you ever opened up your investment account statement to find yourself disappointed in the numbers you’re seeing? Many investors are surprised, and often dismayed, by the performance of their investments. The problem might not be the investment, however. It might instead be that you didn't have a realistic understanding of your investments from the beginning.
Often clients think of stocks as lottery tickets that you buy in the hope they will explode in value and solve all your financial problems. It's simply not the case. Investing in the common stocks of great companies is a plan to participate in the growth of these companies over time. Stock investing is a process, not an event.
How to evaluate stock performance
As you own stocks, you will find that sometimes your account will grow rapidly in a few months. It's natural to think that when the market is at historic highs, it seems that all is well and it's a great time to invest so as not to miss out.
But experts know that when the market is high, a routine and normal pull-back is around the corner. Therefore, buying stocks is riskier than normal. It's a good time to take some profits off the table and invest in other assets that haven't grown as much.
Likewise, when the market is at significant low points, many investors think here is something wrong and they want to stay away from stocks. Often people exit investments all together and sit in cash. This keeps the money safe, but it guarantees zero growth.
Experts know that when the market is down by a significant amount, recovery is inevitable and therefore stocks are a safer investment than normal. This is a great time to move out of cash and into shares of great companies.
Think about investing like a garden. When you put money away for retirement in 10 or 20 or 30 years, it’s like planting carrots in your garden. You don't go out and dig them up every day to see how they are doing. You wait until harvest.
Likewise, with investments you should measure success over a reasonable time period. Experts suggest at three-year rolling average to allow for seasonal market fluctuation. But to get the full benefit, you need to let the investment work longer.
Another metaphor I like to use with clients is to think of financial planning like a long and happy marriage. To use my own very, very, very successful marriage as an example:
- The day I got married, July 27, 1990, the S&P 500 closed at 353.44.
- The day my first child was born, May 4, 1998, the S&P 500 closed at 1,122.07. If I had saved $1,000 in an S&P 500 index fund on my wedding day, it would have been worth $3,174.
- The day my last child was born, September 17, 2004, the S&P 500 closed at 1,128.55. The thousand dollars from my wedding would now be worth $3,193.
- The day my first child graduated high school, June 8, 2016, the S&P 500 closed at 2,119.12. The thousand dollars from my wedding would now be worth $5,996.
- The day I write this, October 13, 2017, the S&P 500 closed at 2,553.17. The thousand dollars from my wedding would be worth $7,224.
Even with two significant market corrections over the 27 years of my marriage, my investment in the S&P 500 still averages 7.5 percent per year if you assume annual compounding. Your principal would double every 10 years. That's a pretty good pace.
Do I need a financial planner?
This long-term perspective is one of the great gifts an experienced financial planner can provide. And if that planner works only for the client as their advocate (a fiduciary advisor) and gets paid only by the client (a fee-only advisor), then the client can expect that wisdom, experience and perspective will help them make better choices about financial opportunities.
To finish on one last metaphor: Just like a great personal trainer will help you to show up at the gym more often and workout more effectively, a great financial planner will help you be more financially successful.
If this article has you thinking about your own circumstances, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on their retirement plans.
Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.