Many industries (especially the financial industry) love to show you charts. Why? Mainly, they provide an easier way to understand more complex ideas - and as humans we tend to grasp a concept with pictures and colors much better (i.e. – a picture is worth a thousand words). Imagine as far back as drawings on cave walls, to Egyptian tombs, to today’s emojis for our texting simplicity. However, what these graphs do not provide are the real-life human emotions that live between the lines.
What better example than the chart below (provided by Russell Investments) from the past year during our COVID pandemic, which is still fresh in the brain’s emotional compartments.
So, what does this chart tell us? If you would have placed $100 dollars in the stock market (represented by the S&P 500 Index- blue line) and $100 dollars in the US bond market (represented by the Bloomberg Barclays US Aggregate Bond Index- orange line) on January 1, 2020 - by the end of the year – it would have been worth 18% and 7.5% more. For those that are percentage challenged - $100 dollars grew to $118 and $100 dollars grew to $108.
At first glance, it depicts a somewhat simple concept of investing success – “don’t allow your emotions to blow up your long-term plan.” Furthermore, if the average investor was or remained patient and disciplined – their returns would have been following the lines in the chart.
However, the more important question is, “how did the average investor react between the lines?” Meaning, the chart (and the lines represented) is emotionless. They didn’t feel the day-to-day tugging of the news and real-life events that were thrown at investors with the onset of a virus that devastated the US and the world.
Those of us in the real world - especially those in retirement or close to retirement who must make financial decision as they witnessed their portfolios temporarily drop by 33.8% - felt as if (according to the financial media) the world as we knew it was going to end. Once again. Because – say it with me – This Time Is Different.
As a result – with emotions in full fight or flight mode - investors pulled out $335.6 Billion from US stocks in the month of March alone1. This is how the real world of investing for real people works – when one reads between the lines.
Which brings me to the broader point of my little essay – if you do not have a comprehensive financial plan AND the voice of a financial behavioral coach to buffer the emotions at their peak as a “night light” when these inevitable events occur – you may have blown up your plan for a retirement of independence and dignity that may not recover.
A final piece of advice from someone who has been advising clients for over twenty-five (25) years – find someone your family trusts and allow them to guide you through these events (because end-of-the-world events happen frequently, according to the financial media). They are worth multiples of what they charge if they are a goal focused and planning driven firm/advisor - even if the only thing they may have accomplished in 2020 was to not allow you to panic and sell, as many did.
Disclosures:
1 Source: Russell Investments, Morningstar Direct. Based on monthly mutual fund, passive ETF flows, Russell 3000 Index
The information above is illustrative, provided for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
Past performance shown is not indicative of future results, which could differ substantially.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index
Melone Private Wealth, LLC (“Melone Private Wealth”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Melone Private Wealth and its representatives are properly licensed or exempt from licensure.
For additional information, please visit our website at http://www.meloneprivatewealth.com/
For current Melone Private Wealth information, please visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with Melone Private Wealth’s CRD# 311638