Pre-Thanksgiving Reminder II

Two days and counting until your brain shuts down for weeks on end. Before the post-Thanksgiving affliction known as “Holiday Brain Freeze” sets in, I’m providing reminders about the economy, financial markets and your own personal investing. Yesterday I started with the big stuff, but today’s focus is you.

As the markets continue to gyrate, I am starting to hear from people who are hyper-focused on their investment accounts. There have been questions about whether people should “do” anything, like sell stocks, or move out of dollar-denominated assets. Despite being through difficult periods like this in the past, investors have short memories. Before we get into over-stuffed Thanksgiving week highs, today we are going back to one of my favorite topics: investors often are their own worst enemies.

According to reams of research, the average stock mutual fund investor has not performed as well as the S&P 500 index. Research firm Dalbar conducted a survey called “Quantitative Analysis of Investor Behavior” which compared the annualized return for the index versus the average stock fund investor from 1986-2005. During this time frame, the index returned 11.9%, while investors returned 3.9%. An 8% differential is amazing and I attribute it to the oldest lesson in the investment book: investors can be led astray by their emotions.

When they see that assets are dropping, they are tempted to sell, while when they are rising, they pile in. In other words, they sell low and buy high. I saw this first-hand over the past few weeks with the questions mentioned above. When stocks were making new highs in July, I did not field one question from a client or a radio listener who wondered whether they should trim gains or perhaps reduce risk. But now that volatility has gripped markets, the anxiety level is creeping into the minds of investors.

How can you manage these trying times? There are three distinctive steps that help seasoned investors withstand the ups and downs of the market. You know these deep down, but it’s worth a reminder, especially as the unofficial kick-off of the holiday season is upon us.

1) Create an investment plan that outlines what you are trying to accomplish. This plan should incorporate your risk tolerance and take into account your time horizon.
2) Prevent your emotions from taking over by crating an asset allocation plan that you periodically check
3) Integrate your investment plan into your larger wealth management plan.

And if you can’t seem to manage the process yourself, by all means, hire a professional who can. Sometimes professional management and peace of mind are well worth the price of service.