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First, a question: How many of you who have invested in the stock market would like to know when the next major market downturn will be so you can protect yourself beforehand?
I\u2019m sure if I were posing this question to a large audience, I would see a sea of hands. I mean, who wouldn\u2019t like to know the answer? Everyone wants to ride the rocket up and would love not to be strapped in for the inevitable fall. As a matter of fact, as an advisor, I\u2019m getting calls all the time from clients saying, \u201cIs this the time to get out? Can\u2019t we take some money off the table?\u201d
So, here\u2019s the problem. Most of the financial media as well as the venerable Warren Buffett, my hero, continually tout the benefits of investing solely in the S&P 500 Index. You know the S&P 500 \u2014 it\u2019s a list of the 500 most important companies in America. It\u2019s made up of the Apples, the Exxons, the Walmarts, and the Proctor and Gambles of the world, just to name a few.
And, believe me, I agree with the idea that this index is truly a wonderful way for an investor to create wealth over a long period of time, but it has certain problems that tend to make it a very mediocre investment for most people.
And you\u2019ll never guess why most people do so miserably with this investment. Here you go, here\u2019s the answer\u2026.ready? It\u2019s because the investment is boring.
It\u2019s a one decision \u201cdecision\u201d that is supposed to last you for the rest of your life. Most of us could not stand idly by without doing something for the rest of our lives. Markets go in cycles; they go up, they go down. Sometimes they go down mildly, and sometimes they go down horrendously. Unfortunately, the average investor can\u2019t stomach the pain and will do something to reduce it.
So here is my first reason, the first myth, that is keeping you broke:
Myth #1
\u201cI should invest in the S&P 500, and it should be the only stock investment I should make!\u201d
What\u2019s the reality behind that idea? Well, as I said, it could be your worst.
So, you might ask me how I know this. Well, I have proof. Numerous studies have shown that, while the S&P 500 had earned 8% annually during the period of 1996-2015 (a 20-year period), the average investor earned only slightly over 2%. That is $320,000 of lost earnings on a $100,000 investment over 20 years.
What accounts for this disturbing differential? I think it\u2019s the emotional impact of suffering through market volatility. It is a result of the compelling force to have to do something during periods of distress. Like I said at the beginning, we all would love to avoid the pain of market downturns.
So, what can one do about it? Well, here\u2019s are some ideas:
#1. Create a diversified portfolio of investments that Ying while others Yang. In other words, add some bonds, add some real estate, add some foreign markets to the mix.
#2. Think of it like the hub and spoke of the wheel on your car, with the hub as the core part of your investment, which can be the S&P 500 and then for the other part, the spoke part, add the other types of investments that I just mentioned.
#3 Read a book on investing psychology. There are so many good books out there that can help you dramatically. They can help you understand your feelings and, by understanding, you may be able to change those feelings and do the right thing during market downturns.
Myth #2
Growth Stocks like the Apples and Googles of the world make you more money than boring stocks like Walmart, and Verizon, and General Electric, and AT&T.
Who doesn\u2019t love a great growth story? Apple going from $3 per share to $140, Amazon rising from $10 to a staggering $800 per share. That\u2019s real wealth creation! Those kinds of stocks are fun and sexy and make great copy for articles and front covers for magazines. These types of stocks disrupt old industries and, in truth, many improve the economy and our lives.