John Bogle, the legendary founder of Vanguard group, is full of wisdom. I often listen to or read his interviews to sift out the pearls. There are many.
In one such interview, Bogle tells a story in which a client visits with his financial adviser on an annual basis.
Each meeting, the adviser tells the client not to buy or sell anything, just hold what you have.
After a few years of receiving the same advice, the client asks the adviser why they are paying him when all the advice he ever gives is just to hold what you have.
The adviser responds by stating that is precisely why they are paying him, to ensure they don’t do anything.
Bogle tells this story jokingly and laughs at the end, but he is very serious about the importance of not trading too much.
While many economic sectors have shown to perform very well in the long term, investor performance often doesn’t come close.
In one particular study, Dalbar Inc. found the average stock investors earn about half the return of the investments they use.
How is it possible to only get half of the return of the investments you are using?
There are many reasons, but the primary culprit is the terrible timing of trades.
The old cliché says to buy low and sell high.
We often repeat this because saying the words is easy, actually buying low and selling high is much more challenging. When your hard-earned money is at risk, staying rational is more difficult.
Imagine the market has just plummeted and your investment statement shows you have lost significant money.
If you follow the ‘buy low, sell high’ wisdom, you should then rebalance your investments and put extra money into investments that have just suffered significant losses. That decision is hard, which is why few people do it.
Now imagine the market has done well and many of your investments have done well.
Again, the ‘buy low, sell high’ strategy would require you to reduce or sell holdings in investments that have done well and rebalance or buy investments that are flat or down. Again, that is unpleasant, and few people do it.
Most investors do the opposite.
Watching hard-earned money disappear is excruciating. They react by selling things that are down and buying things that have already increased.
I see many investors who have invested well become frustrated when they think someone has done better.
I have learned over time not to trust people when they tell you how well they have done investing.
I have met many people who claim they have figured out how to get astronomical returns not realizing that such a feat would place them among the most elite investors in the world.
Managing emotions is the ultimate test for the do-it-yourselfers and future retirees.
If you can’t manage your emotions in a challenging market, you may need to use a professional.