Here’s a perfect illustration of my post from April 24th Need An Extra 4-5% Boost For Your Savings . Why is it that investment returns for a product like a mutual fund or an index (like the S&P 500) are soooo different from investor returns? Because we all make irrational decisions at some time or another, based on emotions like fear or greed.
Fear says: “The energy shortage/Euro crisis/Greek-debt bailout/US national debt/terrorist threat/war in Afghanistan/fall in housing prices/recession is destroying the investment markets. Sell now before things get worse!”
Greed says: “Apple stock/Google stock/gold/oil/corn/real estate/US bonds/emerging market bonds are going through the roof. Get some now before prices go even higher!”
The solution to closing the gap is pretty simple: have a plan that includes broadly diversified investments, buy and sell based on your needs and timing (not the whims of the markets or the media), and stick to your long-term plan. For the 20-year period ending 2011, US stock market investors who stayed invested the entire 20 years–through the recessions in 2001 AND 2008–made 4% more annually than the average stock mutual fund investor. Bond investors fared similarly.
What are you going to do differently going forward to make up the gap between investment returns and your return??