Someone shared some of the information I’m sharing with you here today on Quora and I wanted to share it here with you all because it’s something to consider. I have been blessed and outperformed the stock market averages with my personal investments because I took the advice of Warren Buffet to heart. I maybe paraphrasing but he said that the stock market is the largest wealth transfer of money from the impatient to the patient. How true that statement is. If you bought a stock because of FOMO or fear of missing out, do yourself a favor and get out of investing in the stock market as soon as possible or else you’re about to transfer your money to someone else. And that just statistics speaking.
The fact of the matter is that most people are unwise investors, they don’t have the experience, the time to research, or the stomach to keep their emotions out of investing. Here is a great chart that was prepared by JP Morgan to illustrate what I mean.
This chart shows the average annualized return had you bought and held an asset for 20 years.
Do you notice what the average investor did?
If you have been an investor, did you make a plan and stuck to that plan for the last 20 years? You have to have an exit strategy for all investments whether it’s real estate, retirement or in this case, stocks. More likely I think you may have constantly changed, trying to find something you thought was better based on an article or some Jim Cramer Mad Money episode. Don’t feel bad, I was guilty of this as well before I wised up!
What the article writer wrote was that’s there is a big difference between investment return and what the investor returns. His said, “It is not hard to design a portfolio that should outperform the S&P 500 over an approximate 20 year period. It is IMPOSSIBLE to get a client or individual to stick to that plan.”
When the article author shared a story of how he tried to educate his clients on the proper way to invest, he shared a story that unfortunately wasn’t one of success. His story went like this.
The Initial Meeting:
“Hey client, if we can control risk and massive drawdowns in your portfolio, over 20 years you’ll be much better off than having just been in the S&P 500. Here are 300 nobel prize winning papers, 100 years of research, and 10,000 academic white papers that all agree and conclusively prove this point.
What that means is your portfolio returns will NOT match the S&P 500 year in and year out. The S&P 500 may outperform or under perform some years. Here is the range of what to expect….”
Follow Up:
“Hey author, that all makes a ton of sense. I lost my shorts in 2000 and 2008 and was scared to get back in so haven’t make it all back yet. I really like the idea of having an advisor that thinks for the long term and will help me meet my goals. Let’s do what you suggested.”
Author said, “Great, let’s get started”
One Year Later:
“Client, I’m not really happy, we’re only up 12.5% this year.”
Author said, “That is above our expectations and projections, it’s a spectacular result.”
Client said, “Yeah but my brother is invested in this leveraged FANG (facebook, apple, netflix, google) and its returned over 60% two years in a row. I should have been in that.”
“Client, remember our conversations about risk? I know about that fund, if the FANG stocks decline 10% in a quarter, you will lose all of your money. That’s way to risky for someone that’s 70 years old — or for anyone for that matter.”
Client replies, “You’re an investment advisor, aren’t you supposed to KNOW what stocks are going to go up over the next month?”
Author now Realizing now that the client is a hopeless case, says to the client — “No client, if I knew what stocks were going up for certainty, I’d be a billionaire and not have to have conversations with clients that make me want to jump out a window.”
Client replies, “Well I need you to liquidate all of my accounts, I’m investing everything into that fund.”
Author warns, “Client, that’s a REALLY bad idea. First, if you just hold onto your investments for another 3 days, you’ll not owe short term capital gains taxes. Second, that’s not a great investment…if you want to talk about increasing your risk exposure we can….
But the client has made up their mind. So they sells off the gains, pays quite a bit more in taxes than they should have because they couldn’t wait 2 more days, and puts it all into a leveraged FANG fund.”
The article said at the time, “As of yesterday, the client has lost 70% of his life savings. They sent me an email asking what he can do to get it back. I feel bad for the client but that’s how most investors are.”
So here’s the good news, there are other options that are safe like the banks and that pay a guaranteed minimum percentage annually that destroy the banks rates. On top of all of that, these accounts grown with no capital gains taxes. Let me know if you would like to learn more about them?
Feel free to comment below or send me a message from the healthwealthandrealestate.com website on the “Get in Touch” link at the top of that web page and please like and subscribe to the channel so that you don’t miss any future educational videos. I hope you found this video informational and learned a bunch of new things. I’m happy to help share more information if you reach out to me and I wish you all the best.