“I’ll re-enter the stock market when the market hits the bottom,” is a statement many investors make at some point in their lives. Still fresh on our minds is the economic crisis of 2008 which resulted in the stock market taking a major hit. Many investors sold near or at the bottom and walked away with the promise to re-invest in the future.
After tracking 401(k) data, Aon Hewitt research shows that retirement portfolios have approximately 67 percent more stock contributions today than they have had since 2008. What this trend shows is that investors are becoming more comfortable with the current stock market situation, leading them to re-enter the market with renewed vigor and optimism. The poor financial situation the US has faced since 2008 is becoming a distant memory in the minds of so many investors, making the stock market rise and lulling many investors into a sense of complacency.
Are You Chasing After Short Term Returns or Long Term Wealth Accumulation?
This sense of optimism causes investors to do something that is known in financial circles as chasing returns. This classification of investors generally buy when the market has already made a nice move higher thinking that this time is different. Instead of looking at their portfolio as a way to accumulate wealth and / or income, many feel they can always buy at the low and sell at the high. It’s this “get rich scheme” without a definitive plan that has caused investors to get hurt time and time again.
What many investors need to decide is what level of risk they are willing to accept and then build a portfolio tailored to that level. Some brave investors in 2008-2009 accumulated positions as the market declined focusing on a long-term plan of where they wanted to be. Others had a risk adverse strategy in place where they unemotionally and systematically removed funds from the market and then redeployed capital in the same systematic approach while still maintaining their allegiance to capital preservation.
You constantly hear from investors that “Wall Street is crooked” and “the market is rigged”. The reality is for an investor that first establishes their risk profile and then executes a plan of investing based on it to not get their feelings involved and eliminate the static noise all around them. Popular financial media outlets are some of the biggest destroyers of wealth we have witnessed over the last 40 years. They report and glamorize fads and hot trends and issues. In a recent movie focusing on the corruption of Wall Street, many viewers missed the most important line which says it all, “do you know what the difference is between the middle class and the wealthy class when it comes to investing? The wealthy class buys high quality stocks while the middle class buys the so called lottery tickets”.
Lessons Learned From the Ghosts of Markets Past
So how many dot.com, hot trend investing, IPO, penny stock disasters do you need to realize that you are only hurting yourself by chasing them? Smart investors have learned from the mistakes of investors before them that high quality stocks or ETFs that hold similar securities may be boring to many investors, but in the aggregate they have historically allowed an investor to accomplish their goals over the long term.
Our firm is dedicated to helping our clients avoid the fads and the lottery ticket mentality and instead create an investment plan that aligns with their risk capability. Those who stuck to their original plan during the crash of 2008 are in a far better position than those who panicked at the rapidly falling prices of stocks and sold them emotionally and unsystematically. Unfortunately, it’s probably too late for them. The best advice we offer to any investor is to define risk and unemotionally execute it.
A successful portfolio requires constant attention to detail. Many investors don’t have the time, the tools or the patience to wade through the minutia. While many could do so if they really wanted to spend the time, the reality is many investors get caught in the ever spinning Wall Street / financial media noise. This causes many to buy high and sell low as TV personalities try and predict the next big thing. What these people really need is a financial adviser that has been through many of the battles and wars that can help them define their risk tolerance and then unemotionally and systematically manage their wealth.
Time to Make a Choice – What Type of Investor Do You Want to Be?
So you now have a choice. Do you want to be the investor that uses emotion, flies by the seat of their pants, buys into the next hot fads, plays the get rich quick / lottery ticket game all while doing it themselves or with a high price broker or financial adviser? Or do you want to be the investor that personally executes or hires an adviser to establish your risk profile and then unemotionally and systematically executes your plan? The choice is ultimately yours.
George Gerner is the director of Marketing and Investor Relations at TRG.