The Greatest Financial Mismatches In History

The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only.  – John Maynard Keynes

It’s time we expose a few of the greatest financial mismatches in history. At the top of my mind, due to a myriad of behavioral and cognitive hiccups, are select retail investors (you know who you are), who must come to grips with how they’re handling current stock market volatility.

It’s a moment of truth

Too many investors possess a hook-up mentality with stocks. Holding periods are at historic lows. According to the New York Stock Exchange’s extensive database, the average holding period for stocks in 1960 was 8 years, 4 months.

As of December 2016, it was 8.3 months.

Last year’s unprecedented stock market performance for the S&P 500 was the worst event for investor psyche.

I’ll explain.

No doubt, it was a magical year. The market closed higher every month (first time in history). The Sharpe Ratio or returns on the S&P relative to the risk-free (Treasury Bills) and volatility was 3.7. Since volatility was non-existent last year, risk-adjusted returns for the market were among the best I ever lived through; at least the highest in over 50 years.

Think of it like dating the most popular girl (or guy), in high school. In the beginning, you wonder how the heck it happened. Such luck! Eventually, you believe you’re entitled to dating prom kings and queens in perpetuity. The problem is ego. You convince yourself the perfect prom date is the norm and begin to compare every date after to “the one.” What a great way to set yourself up for failure missed opportunities and myopia that slaughters portfolio returns (and possibly, relationships!)

In 2017, equity investors witnessed a storybook investment scenario. This year so far? Reality bites. It’s not that your adviser doesn’t know what he or she is doing; it’s not the market doing anything out of the ordinary, either. The nature of the market is volatility, jagged edges and fractals. The sojourn, the Sunday drive in perfect weather with the top down on a newly-paved road in 2017, was an outlier. The environment you’re investing through today is the norm; therefore, the problem must be the driver, the investor who doesn’t realize the road conditions are back to resembling 5 pm rush-hour in a downpour.

Do you experience frustration with a purchase your adviser implements or recommends if the price doesn’t quickly move in your favor? Do you question every move (or lack thereof), a financial partner makes?

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Gary Anderson 4 months ago Contributor's comment

Entertaining article. Silly putty and a dreamy prom make one a bad stock picker.