In volatile times, human nature can wreak havoc on the returns of investors. When investments under-perform for a short period, people tend to feel discouraged and uncertain, often deciding to take their losses or shift to a style that seems to be working better. When investments enjoy a period of good short-term results, people feel renewed confidence and optimism and money pours in. Ultimately, we believe investors are best served by maintaining a long-term perspective.
Although the study below focused on actual mutual fund investing, we believe the lesson applies to all investments.
How frequent switching of investments can hurt returns is illustrated by the following facts: From 1988-2018, the S&P500 Index delivered an average annual return of 10.0% while the average stock fund investor earned only 4.1% annually per year. Short-term thinkers rarely prosper. Long-term buy and hold investors benefit from the power of compounding.
Average Stock Fund Investor Return vs. The S&P 500 Index Return (1988 – 2018)