Last of our 10-part series Few of us remember being toddlers, but many of us sure remember raising them! "Johnny, put that down!
Mary, stay inside the yard and Tommy, stop chasing Mary! For goodness sake kids, could you all please settle down!" Sorry parents, they will never settle down but will instead become more "grown up" in their restlessness. We are all impatient in many different ways, including how we invest our money. Symptoms of this include active stock trading, incessantly switching mutual funds and following the latest "gurus".
A few years ago, I asked one of my sons to do some research on the flows of money into and out of mutual funds, using data from the Investment Funds Institute of Canada. The results backed up observations I've had for years: Investors in Canada buy high and sell low. Bad idea.
Because Canada doesn't have too many studies available on how investors do, versus the markets, I looked south of the border, knowing their investor behavior is not much different than ours.
Each year, Dalbar Research measures mutual fund investor performance versus market benchmarks. The research shows that the "average" equity fund investor significantly underperforms the market rate of return.
The main reason for this poor relative performance is lack of investment discipline. The short-term focus of many fund investors compels them to buy high and sell low, and to hold funds for less than five years, on average - often shifting to yesterday's hot performer.
I'm 52 years old. I love what I do so much that I don't actually ever want to fully retire but let's pretend that I will. My time frame for investing extends well past the day my wife and I retire. With good health and medical advances, this could span up to half a century and our investment portfolio needs to fuel the increasing expenses of those years.
Because the history and diversification of the Canadian stock market is too thin, I took a look at the history of the United States stock market since 1926. Those markets averaged around 11.25 per cent. That's a whole lot better than the average 4.06 per cent for US Treasury bills! The interesting thing is that there has never been a 20 year period since 1926 where the U.S. stock market has done worse than an average 2.09 per cent compound rate of return. The worst returns over 30 year periods have been around eight per cent.
Over my anticipated investment time frame, I'm prepared to deal with risk because I am thinking long term and letting nothing knock me off course. I invite you to do likewise. I think we all know intuitively that it's simply the right thing to do.
The opinions expressed are those of Richard Vetter, BA, CFP, CLU, ChFC. Vetter is a senior financial advisor with WealthSmart Financial Group/Manulife Securities Incorporated in Richmond. Manulife Securities Incorporated is a member of the Canadian Investor Protection Fund.
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