Why do individual investors tend to underperform in the market?
Is it a lack of research or the need to be an expert in Modern Portfolio Theory? Maybe. But the most likely answer is psychology.
It's human nature to be optimistic when the market goes up and pessimistic during downturns. This can lead to emotional selling and buying.
Investors who attempt to time the market often miss the best performance days. That's why it's important to tune out the noise and focus on your time horizon, risk tolerance, and goals.
During the 20-year period from January 2, 2002, to December 31, 2021, we can see the danger of missing some of the market’s best days. As the chart illustrates, a $10,000 investment on January 2, 2002, would have increased to more than $61,000 by the end of 2021.1
Had an investor been out of the market and missed just 10 of the best days during this period, that investment would be worth less than $29,000. If an investor missed 20 of the best days, that investment would be worth $12,804. Miss 40 or more of the best days, and an investor would have lost money. Investors who sell stocks in response to challenging market conditions often miss those all-important "best days."
That's why we believe it's critical to follow your financial strategy. This is especially true—but harder to do—in times of economic uncertainty and market volatility. As financial professionals, we believe one of our main priorities is to help our clients keep emotions out of the decision-making process and focus on their financial goals.
Many of our current clients started by asking us to analyze and review their current investments. If you'd be interested in getting a second opinion, please call or email us, and we can set up a time to connect.
1 JP Morgan Asset Management. The dollar amount shows the performance of a hypothetical $10,000 investment between Jan. 1, 2002, and Dec. 31, 2021. Returns are based on the S&P 500 Total Return Index. Indices do not include fees or operating expenses and are not available for investment. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change, and shares, when sold, may be worth more or less than their original cost.
Market Uncertainty and Investor Behavior
January 21, 2023