Why Behavior is Half the Battle

Successful investing requires you to do the most counter-intuitive thing in the world, something that totally runs against human nature and the fight-or-flight instinct that’s been bred into our species over eons – being excited for down-markets and bad news.

By my own informal estimation, I would say that 98 people out of 100 see bad news and stocks dropping as a sign they should stop investing and begin holding all their assets as cash. The other two crack huge smiles when markets begin to get creamed and prepare to buy.

Those two are going to do better than everyone else over time because they are able to do what everyone else cannot.

Carl Richards has an amazing sketch illustrating the mindset that the media reinforces of only buying when “things are good”:

CoastClear__23485.1338494546.570.450

 

The truth is, if your time horizon is long and you are saving a chunk of what you make each year, the very best thing you can do is ignore whether or not “the coast is clear” and simply continue to leg in to stocks. Not every purchase you make will take place at a great time, but so what? Won’t mean a thing in twenty years – so long as you keep going.

Fidelity is out with an amazing study I want to show you.  They look at 12 million individual 401(k) plan participants over the last five years and measure how important their behavior was to the recoveries of their retirement accounts:

The S&P 500 closed at 677 on March 9, 2009, the market bottom, increasing to 1,569 on March 31, 2013.2

Many preretirees, particularly those who were age 55 and older, were vulnerable to setbacks during the market decline. And yet, many of them saw their balances recover. For employed preretirees who have invested continuously over the previous 10-year period, average balances over the past five years increased from $169,100 at the end of the first quarter of 2008 to $255,000 on March 31, 2013, a 51% increase. Fifty-seven percent of that increase was due to market action, while the remaining 43% was due to net contributions (participant and employer contributions, less any withdrawals). For this set of 10-year continuous preretirees, the average employee contribution (excluding the employer portion) per contributing participant was $9,630 for the 12 months through the first quarter (Q1) of 2013, up from $8,410 for the 12 months through Q1 2008.

While preretirees overall have recovered well since the financial crisis, younger participants who could afford to have higher equity exposures reaped even larger increases in balances. For 10-year continuous Gen-Y3participants, the average balance increased 145% between Q1 2008 and Q1 2013. For Gen-X4 participants, this increase was 97%.

Here’s the chart:

401k-trends-chart-1

 

Bottom line – behavior, ie continuing to contribute through the difficult conditions of the Great Recession and Credit Crisis, was about half the battle. Market performance did the half of the heavy lifting and those who did the right thing have ben richly rewarded for it. These simple investors don’t realize it, but they have outperformed almost every hedge fund manager and smart-ass market-timer in the universe.

Who’s the Dumb Money now?

Source:

Fidelity

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. nhạc chuông commented on Sep 14

    … [Trackback]

    […] Read More to that Topic: thereformedbroker.com/2013/06/27/why-behavior-is-half-the-battle/ […]

  2. bitcoin evolution review commented on Sep 23

    … [Trackback]

    […] Information to that Topic: thereformedbroker.com/2013/06/27/why-behavior-is-half-the-battle/ […]

  3. Vape Juice commented on Sep 25

    … [Trackback]

    […] Find More on that Topic: thereformedbroker.com/2013/06/27/why-behavior-is-half-the-battle/ […]

  4. jlroofandsiding.com commented on Oct 19

    … [Trackback]

    […] Info to that Topic: thereformedbroker.com/2013/06/27/why-behavior-is-half-the-battle/ […]

  5. DevOps Services commented on Nov 02

    … [Trackback]

    […] Find More here to that Topic: thereformedbroker.com/2013/06/27/why-behavior-is-half-the-battle/ […]

  6. 4000 hours youtube buy commented on Nov 23

    … [Trackback]

    […] Read More on to that Topic: thereformedbroker.com/2013/06/27/why-behavior-is-half-the-battle/ […]

  7. buy ruger long guns online commented on Dec 01

    … [Trackback]

    […] Information on that Topic: thereformedbroker.com/2013/06/27/why-behavior-is-half-the-battle/ […]

  8. rbc canada online banking commented on Dec 04

    … [Trackback]

    […] Read More to that Topic: thereformedbroker.com/2013/06/27/why-behavior-is-half-the-battle/ […]

  9. replica watches commented on Dec 15

    … [Trackback]

    […] There you can find 26816 more Info on that Topic: thereformedbroker.com/2013/06/27/why-behavior-is-half-the-battle/ […]

  10. tangerine banque signin commented on Jan 17

    … [Trackback]

    […] Read More Information here on that Topic: thereformedbroker.com/2013/06/27/why-behavior-is-half-the-battle/ […]

  11. exact replica watches commented on Jan 23

    … [Trackback]

    […] Find More Info here on that Topic: thereformedbroker.com/2013/06/27/why-behavior-is-half-the-battle/ […]

  12. online dumps shop commented on Jan 26

    … [Trackback]

    […] Read More to that Topic: thereformedbroker.com/2013/06/27/why-behavior-is-half-the-battle/ […]

  13. Unicc commented on Jan 29

    … [Trackback]

    […] Read More to that Topic: thereformedbroker.com/2013/06/27/why-behavior-is-half-the-battle/ […]