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Dave Sather's Money Matters: ..Into the Fire

By By Dave Sather
Feb. 26, 2013 at 4:05 p.m.
Updated Feb. 25, 2013 at 8:26 p.m.


Although James and Samantha were new clients, the conversation was like many before.

Samantha told me they were tired of investing on their own. It seemed as if they bought in after the markets ran up and had a knack for selling out at exactly the wrong time. Jim felt like they were jumping from the frying pan into the fire.

They were not alone.

According to Birinyi Associates, more than $275 billion in net withdrawals were taken from U.S. stock mutual funds over the last four years as fear consumed investors and derailed well-intentioned plans. Making matters worse, over the same time period the stock markets recovered and doubled off their lows in 2009.

This self-defeating behavior is not unique.

Every year, DALBAR Inc. publishes its Quantitative Analysis of Investor Behavior Report. The most recent study found that from 1992 through 2011, the Standard & Poor's 500 Index returned 7.8 percent per year. During the same period, the average investor in U.S. equity mutual funds earned just 3.5 percent - less than half. Most recently, in 2011 the average equity fund investor produced a -5.7 percent return while the S&P 500 generated 2.1 percent. Similar analysis on bond fund investors also resulted in significant underperformance.

This survey is updated each year with similar results - the average investor consistently costs themselves several points of return.

Much of the problem lies in impatience and not understanding "why" an investment is held within a portfolio or the time frame over which an investment should be held.

Furthermore, every money manager will underperform the market eventually. Even the best managers will underperform for two or three years at a time. That does not mean a given manager has suddenly lost the ability to evaluate investment options.

Despite this, individuals will routinely sell out of assets or terminate managers when they underperform as the psychology of fear and decline tells us to sell when assets are actually most attractive.

Unfortunately, as the average investor sells out, they subsequently chase after whatever asset or manager has been "hot" lately - usually overpaying in the process.

As I discussed this with James and Samantha, James nodded his head, acknowledging with the benefit of hindsight that he had done this several times.

Samantha was visibly stressed as their portfolio had been hit hard. Sitting in the money market was yielding them virtually nothing, and CDs were not doing much better. Every time they went grocery shopping, they knew their investments were not keeping pace with inflation. They needed commonsense advice on how to proceed.

In helping the pair, we started by discussing that the stock market is a long-term proposition, meaning a more than 10-year commitment. That does not mean we just sit and hold, but it is a mindset that allows us to hang in there when bad news causes volatility.

Many days ,there is a substantial disconnect between a stock's price and the true value of the company as a whole. Even though we did not like the volatility incurred during 2009, we could easily go to Wal-Mart and see that people were still shopping. In review of their financial statements we knew they were still earning money. Over a 10-year period, the amount of money a company earns has a far greater impact upon its true value than anything else.

If you are going to be a stock investor, you must recognize and embrace the fact that daily stock prices are very bumpy. However, short-term changes in a stock's price have little to do with the value of a company as a going concern. Again, earnings matter most and the discipline to stay focused is a premier investment virtue.

As we finished the meeting, James and Samantha left with a better understanding of how different investments fit their goals and walked away with the beginnings of a better plan.

Cash and short-term fixed income would be used to satisfy emergency needs or short-term items like their daughter's upcoming tuition.

Conversely, stocks and other long-term assets would be used to satisfy goals that are further down the road. The couple also recognized that although daily stock market volatility can be irritating, historically, it has been the best alternative to grow long-term wealth.

Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other Wednesday.

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