Here's a reminder of why individual investors fail

[disneysteve]

I saw a chart today that once again illustrates why so many individual investors fail. The chart shows the amount of money going into index mutual funds each year since 2007.

The amount invested each year from 2007 to 2012 was pretty flat, ranging from $49 billion in 2008, the year of the crash, to $61 billion in 2007, the year right before the crash.

The inflow really didn't start increasing until 2013 when it spiked to $114 billion, 5 years into the recovery. That would suggest that a lot of investors sat on the sidelines from 2008-2013. That means they missed 2009 when the S&P 500 was up 26.46%, 2010 when it was up 18.06%, and 2012 when it was up 16% (it was only up 2.11% in 2011).

Inflow continued to increase hitting $149 billion in 2014, $166 billion in 2015, and a record $197 billion in 2016. So not until 8 years into the bull market did the amount of money being invested reach its peak. Where were all of those folks for 8 years? Did they have their money sitting in cash? If so, they missed out on one of the greatest bull markets ever. The best time to invest was back in 2008/2009 when the correction was beginning, not in 2016 when the market had racked up double digit returns for 6 out of 8 years.

What will happen next? There will be a correction and a lot of the people who jumped in during 2016 will panic and sell and swear off the stock market for years or maybe even forever. The smart money will be jumping in at that point and buying everything up when it's essentially on sale.

Who won? The people who stayed the course and continued to invest over time. Recently, I posted a thread listing our portfolio value at the end of each year. It included these figures:
2007: $393,595
2008: $280,208 (market crash)
2009: $395,673 (back to pre-crash level)
So by not jumping ship in 2008, we were right back where we started (even slightly ahead) just a year later, and now, the total stands at well over $900,000, more than 3 times what it was in 2008.

Slow and steady wins the race, folks.

[Captain Save]

I think pre-retirees and retirees panic (and who blames them.. their risk tolerance didn't warrant their allocations. .they don't know any better ) .. but one narrative that I think is way off mark is the fact that people are timing the market. Do people really thing that the average American is looking at his account and deciding to pull money in and out because he's timing the market?

Life happens ... In 2008 people pulled money out of the market ..not because they were timing but LIFE happened . .. people lost their jobs. People who can afford to hold on until the market picks up are people who were prepared.. .they have CASH. they have an alternative to pool from while they wait. An emergency fund is a great example .. but if your emergency fund is 3-6 months. you bettter find a source of income before it runs out.

by 2013 . .the economy was doing much better , people were able to afford to save more. While I do think some were pulling money out at the wrong time, I think they were the minority.

[greenskeeper]

gee maybe it was because they were losing their jobs and homes so they didn't have money to invest when the economy took a crap?

[msomnipotent]

My husband started working for the start-up that ruined us around that time. I can't remember if it was 2006 or 2007. My husband cashed out our main retirement fund to make payroll (which wasn't even his responsibility!!!) and pay some of our bills. I personally know several people that worked as cashiers and waitresses that had to cash out all of their savings just to pay bills, and both my parents and my aunt retired between 2007 and 2009.

Plus, the first of the baby boomers turned 64 around the same time, which I'm willing to bet had something to do with it, too.

[disneysteve]

I think pre-retirees and retirees panic (and who blames them.. their risk tolerance didn't warrant their allocations. .they don't know any better ) .. but one narrative that I think is way off mark is the fact that people are timing the market. Do people really thing that the average American is looking at his account and deciding to pull money in and out because he's timing the market?

Yes. That's exactly what people do. Study after study has documented that. People trade too much. People buy high and sell low. People keep far too much in cash because they're afraid of the stock market. And the people that do invest in stocks panic at the first downturn and retreat to their 0.1% savings account because they don't understand or accept that the stock market is a long term investment.

After every market correction, I always see articles about "investors" being scared off, selling off their holdings, and retreating to cash, swearing they'll never mess with the stock market again. And the worst thing is it's often the younger people in their 20s and 30s who do that. They are the ones that can benefit the most from that long term growth and compounding.

[disneysteve]

Certainly there are people who cash out because they need the money but lots of people cash out because they don't understand the market. They panic at the first sign of trouble. They aren't in it with a long term mindset.

[Captain Save]

Yes. That's exactly what people do. Study after study has documented that. People trade too much. People buy high and sell low. People keep far too much in cash because they're afraid of the stock market. And the people that do invest in stocks panic at the first downturn and retreat to their 0.1% savings account because they don't understand or accept that the stock market is a long term investment.

After every market correction, I always see articles about "investors" being scared off, selling off their holdings, and retreating to cash, swearing they'll never mess with the stock market again. And the worst thing is it's often the younger people in their 20s and 30s who do that. They are the ones that can benefit the most from that long term growth and compounding.

I see the same articles .. but I'm skeptical of the conclusion of those articles..

There is a financial crisis . The financial industry is not only losing a lot of money but they see a lot of money being withdrawn by investors. A journalist picks up the story and interviews an "expert" most likely a personal financial advisor who gives them the narrative and this is your headline.

There's a lot of truth to it but I think people being forced to make a move is the leading factor behind "investor behavior" during hard times. "emergencies" tend to pop up during these times even for someone stable, they tend to have family members in financial trouble.

This is my experience so I 'd be curious to know if you guys see something different in your circles. Most people I know have money in the market but I hardly know anyone who pays attention to it , let alone trades in and out of the market. The "average investor" is not an investor at all.

[Smallsteps]

While emergencies or crisis may account for some cashing out .. I think the larger amount of people pulling out money or quit adding to investments is because they panic or get scared off in that time frame.
I had co workers simply stop contributing to 401k because they "lost" money on paper. I tried to tell them it will come back time is their greatest asset, they simply did not want ANY chance to lose any principle.
Most of them who lost bigger then others took the more volatile choices that the plan offered chasing past performance %, then blamed the company for not having someone to hold their hand and make plan choices.

[disneysteve]

The "average investor" is not an investor at all.

I think the larger amount of people pulling out money or quit adding to investments is because they panic or get scared off in that time frame.
I had co workers simply stop contributing to 401k because they "lost" money on paper. I tried to tell them it will come back time is their greatest asset, they simply did not want ANY chance to lose any principle.

I agree with both of you. Many "investors" aren't investors at all. They are investing but they aren't doing it with intent or understanding or knowledge of what they're doing. If someone pulls money out of a 401k because their balance falls a bit on a quarterly statement, they just don't know what they're doing.

I think automatic enrollment in 401k plans is a great thing, but I also think it amplifies this problem.

[dczech09]

I am a big believer in education. People need to learn how to drive a car before they get behind the wheel. People need to learn how to walk before they can run.

People need to learn about investing, before they actually invest. Automatic 401k contributions are a great thing. However, I think companies do a real disservice to their employees by utilizing an automatic 401k, but not providing the educational support.

Learning about investing before actually investing is so critical. That is where the education of how the market works comes into play. That is how average investors learn that market corrections (which can be increases as well as decreases) are normal.

Yes, some people do pull money out during a job loss or some other crisis. But you cannot tell me that people pull out the majority of their investment dollars simply to cover a job loss or some other crisis. And if they are pulling out a majority or all of their money, they did not have much to begin with, which could mean that they have not been investing aggressively enough to begin with or have not been investing for much time.

It has been proven that pulling out that kind of money is a reaction based on fear. It is not a logically decision, but rather a rash and spur-of-the-moment decision. "OMG! The market is crashing! The world is coming to an end! I better cash out my money because the stock market it evil!"

I cannot find the article, but I read a study a while back that pointed out that the main reason people do not successfully build a retirement nest egg is because they never actually invest to begin with. Or if they do invest, they do not take on enough risk. People are generally too averse to risk.

Fear gets in the way of actually investing. The financial world seems far too complicated for the average person, and they either end up suffering "paralysis by over-analysis" or they outsource all of their money management to a guy in a fancy suit who confuses them with fancy talk and rosy promises. And when the "financial advisor" fails to 1) invest based on the client's risk tolerance and 2) work with the client to help them modify their risk tolerance, that is a knock on the financial advisor (not the investor).

Bottom line is this: the financial services industry still is not client-focused enough. They are too busy worrying about their own profits and fail to act as a proper fiduciary. Maybe the new DOL rule will help, but I doubt it. For crying out loud, many larger financial services firms spent more time clamoring about the DOL rule change, rather than focusing on helping their clients. If that does not smell like "profit-driven," then I don't know what does.

When was the last time you heard of a financial advisor spend time with the clients to help them "lift up" their risk tolerance? When was the last time you heard of a financial advisor teach about market crashes before the crashes happen? I am sure some financial advisors do this, but sadly they are the minority.

[Captain Save]

I am a big believer in education. People need to learn how to drive a car before they get behind the wheel. People need to learn how to walk before they can run.

People need to learn about investing, before they actually invest. Automatic 401k contributions are a great thing. However, I think companies do a real disservice to their employees by utilizing an automatic 401k, but not providing the educational support.

Learning about investing before actually investing is so critical. That is where the education of how the market works comes into play. That is how average investors learn that market corrections (which can be increases as well as decreases) are normal.

Yes, some people do pull money out during a job loss or some other crisis. But you cannot tell me that people pull out the majority of their investment dollars simply to cover a job loss or some other crisis. And if they are pulling out a majority or all of their money, they did not have much to begin with, which could mean that they have not been investing aggressively enough to begin with or have not been investing for much time.

It has been proven that pulling out that kind of money is a reaction based on fear. It is not a logically decision, but rather a rash and spur-of-the-moment decision. "OMG! The market is crashing! The world is coming to an end! I better cash out my money because the stock market it evil!"

I cannot find the article, but I read a study a while back that pointed out that the main reason people do not successfully build a retirement nest egg is because they never actually invest to begin with. Or if they do invest, they do not take on enough risk. People are generally too averse to risk.

Fear gets in the way of actually investing. The financial world seems far too complicated for the average person, and they either end up suffering "paralysis by over-analysis" or they outsource all of their money management to a guy in a fancy suit who confuses them with fancy talk and rosy promises. And when the "financial advisor" fails to 1) invest based on the client's risk tolerance and 2) work with the client to help them modify their risk tolerance, that is a knock on the financial advisor (not the investor).

Bottom line is this: the financial services industry still is not client-focused enough. They are too busy worrying about their own profits and fail to act as a proper fiduciary. Maybe the new DOL rule will help, but I doubt it. For crying out loud, many larger financial services firms spent more time clamoring about the DOL rule change, rather than focusing on helping their clients. If that does not smell like "profit-driven," then I don't know what does.

When was the last time you heard of a financial advisor spend time with the clients to help them "lift up" their risk tolerance? When was the last time you heard of a financial advisor teach about market crashes before the crashes happen? I am sure some financial advisors do this, but sadly they are the minority.

Yes ...knowing what you're putting your money into ... knowing basic fundamentals of how these things work.

Though I understand why you say that , I think automatic contribution sounds good in theory but i hasn't done anybody good .. people have not become better investors. It's giving folks a false sense of security. "oh they told me if I put money in this account I will be all set to retire"

My assessment is anecdotal , I don't know exactly how much money people are pulling out of their accounts. I definitely do not see any average guy out there "timing " the market. To come back to 2008 , you have people who are losing their houses, though the smart thing would be to cut your losses , many would exhaust whatever they have to save their home. Now you couple that with the fact that the money that the market was expecting is not there, less people are working so less contributions to 401k .. people who are working are not making as much because hours were cut back , and yes of course many people pulled out so that factors in as well but I think that part is overstated. I may turn out to be wrong but I've never seen a "study" that has impressed me, it's a narrative and it serves the financial advisors well.. "you can't take care of your money" "give it to me and I'll show you how to be a discipline investor"

One last thing people don't realize. If everybody holds still during a market crash... there won't be a market crash. If everyone is taught to keep your money in, who will take money out of the market to create that opporunity for the real opportunists?

as far as your other points
- "lifting up" someone's risk tolerance is very dangerous.. You're a financial advisor . not a behavioral counselor (if that is a thing).. and that is also a recipe for lawsuits especially now with DOL fiduciary rule...Besides FA's get paid more if you put more money in stocks anyway , and that's both the one who get commissions and the ones who get an Asset under management fee
- DOL fiduciary like most regulations is really not about the consumer, I can elaborate if you want to go that route.
- We can't look to FA's to solve a basic problem. We have a financial literacy problem in this country and it's an easy fix, more regulation in the financial industry is only making the financial industry more expensive for those who need assistance.

[disneysteve]

I think automatic contribution sounds good in theory but i hasn't done anybody good .. people have not become better investors. It's giving folks a false sense of security.

I'm not sure I agree. I think many people in auto plans would be saving absolutely nothing otherwise. The auto amount isn't enough something is better than nothing.

If everybody holds still during a market crash... there won't be a market crash.

Very true. We could say the same about the housing bubble and crash. If people hadn't signed up for insane loans that they couldn't possibly afford and paid ridiculous prices for houses, way more than they were worth, the whole fiasco wouldn't have happened.

[dczech09]

If everybody holds still during a market crash... there won't be a market crash. If everyone is taught to keep your money in, who will take money out of the market to create that opporunity for the real opportunists?

No matter what, there will always be fluctuations in the financial markets.

Most individual investors do not intentionally or consciously "time the market." They inadvertently do so when they jump out thinking "I will get back in when the market starts to get better." It is a reaction based on fear, but the net result in still "timing the market." We will never be able to stop 100% of people from doing this.

Also, most trading these days is done by professional traders and institutional investors. We certainly will not be able to convince them to hold steady. They have benchmarks to keep hitting to keep their jobs, so they will do what it takes to avoid losses (even if they paradoxically miss their benchmark as a result, at least they are "trying").

as far as your other points
- "lifting up" someone's risk tolerance is very dangerous.. You're a financial advisor . not a behavioral counselor (if that is a thing).. and that is also a recipe for lawsuits especially now with DOL fiduciary rule...

It is not so much about behavioral counseling as it is about education. It is simply about helping clients understand that financial markets can and do fluctuate. It is about helping clients understand that the markets have, and will, recover from even the biggest and baddest market crashes. It is about helping them understand that slow and steady wins the race, and pulling money out to avoid losing investment value is actually very paradoxical.

Besides FA's get paid more if you put more money in stocks anyway , and that's both the one who get commissions and the ones who get an Asset under management fee

The whole point of the DOL fiduciary rule is to enforce financial advising to prevent them from acting in their own best interest. So actually educating clients on the nature of the markets and helping them "lift up" their risk tolerance is very much in line with the spirit of the DOL fiduciary rule.

- DOL fiduciary like most regulations is really not about the consumer, I can elaborate if you want to go that route.
- We can't look to FA's to solve a basic problem. We have a financial literacy problem in this country and it's an easy fix, more regulation in the financial industry is only making the financial industry more expensive for those who need assistance.

I could not agree more.

Yes, the DOL rule change was more about regulation than it is about actually helping the consumer. Yes, financial regulation is making the financial services industry more expensive to the point that it is not affordable to those who truly need the assistance. Yes, we have a financial literacy issue and we cannot look (entirely) to financial advisors to solve the problems.

I agree with all of that.

However, there are no easy solutions or fixes. Overall, this is a very complex problem. If it wasn't, there would be nothing to talk about.

People need to be more educated about financial matters. Personal finance should be required in all high schools, and people should take the time (30 minutes per week is enough) to pay attention to their finances. That would go a long way toward solving the financial literacy issue.

Until regulators get smart and realize it is their regulations that are causing problems, they will continue to regulate even more, thus further exacerbating the problems.

[Nutria]

We have a financial literacy problem in this country and it's an easy fix

LOL

Half the country has an IQ under 100, and even for people with above average intelligence, "math is hard" is real, not just an allegedly offensive Barbie comment.

[disneysteve]

We have a financial literacy problem in this country and it's an easy fix

Really? What's this easy fix you speak of?