Let’s Not Be Human

March 16th 2015, by Garrison R. North

Every quarter, J.P Morgan Asset Management releases a small flip book called “Guide to the Markets.” It has 70 pages of colored charts that show statistics on the economy, U.S. and foreign stocks, U.S. and foreign bonds and asset allocation. The “Guide” is my go-to resource for information on what is happening in the various sectors of the market.

One of my favorite charts in the guide shows various investment returns by asset class for the last 20 years. I was surprised to find that at the low end of this chart, returns for the “average investor” are shown at 2.5% annualized for the last 20 years, just barely beating the rate of inflation for that time period (2.4%). Meanwhile, a diversified portfolio that includes commodities, real estate, stocks, bonds and alternatives returned 7.95% annualized for the same time period. There is a substantial spread in returns for the average investor vs. a diversified portfolio because of the way the average investor reacts in difficult market conditions.

At Master’s, one of our jobs is to help guide clients through the rocky waters of investing. What makes this difficult is that we share something in common with all of our clients: we are human! What I mean by human is that when losses in the market rear their ugly heads, it is easy to let emotions override rational thinking. These times test our mettle and force us to hold onto some of our long held convictions that include diversifying our clients’ portfolios and investing with a long lens. These two convictions are very hard to stick to when we see negative returns in the market, both for us and the “average investor.”

As we continue to experience volatility in the market, we are presented with an opportunity to revisit the conversation of risk management and address a bottom line question: How much loss am I willing to risk for the possibility of a gain? Before we are forced to answer this question at an emotional time, let’s make sure we know our time frame and actual tolerance for risk. As a partner in your financial well-being, we want to help you make prudent investing decisions that are aligned with your goals. Together, let’s not be “human!”

*Diversification seeks to reduce the volatility of a portfolio by investing in a variety of asset classes. Neither asset allocation nor diversification guarantee against market loss or greater or more consistent returns.  Past performance does not guarantee future results. Annualized returns represent the 20-year period ending 12/31/13.