Investors have spent decades trying to maximize their returns while simultaneously minimizing their risk.

Some investors miss out on great investment opportunities because they are afraid of loss, while others pour everything into volatile investments and lose most of their capital.

So how do you strike the balance between risk and reward?

The most important part of investing is to stay invested in a portfolio that will maximize your ability to meet your financial goals and reduce your urge to sell during the next market downturn.  Truth is, most investors experience poor performance for three reasons:

1) They try and time the market

2) They chase returns (i.e. invest based on past performance)

3) They hold way too much cash because they are not confident in their ability to make the right investment choices.

Average Investor Behavior

The average investor’s goal is to mitigate their risk while still participating in the market to enjoy returns, asset appreciation, and more. However, many investors do not actively participate in the market which diminishes most possibilities for return.

According to a report by JP Morgan, diversified portfolios generally perform well over time, even if they are considered extremely conservative.

In the chart below, stocks have returned an average of 11.3% annually since 1950, and a conservative 50/50 bonds and stocks portfolio has returned 9.9%.

In the same report, the average investor generates a mere 2.5% annual return on average. This indicates that the average investor is most likely holding on to cash or money market accounts and leaving most of their capital on the table.  We have been hearing hesitation from many prospective clients to invest near the all-time highs in the market since 2013!  Since then, the S&P 500 is up over 150% (as of June 29, 2021).    

Breaking The Mold with Diversification

As you can see in the graphic below, the average investor does not fare well compared to most other asset classes, and only performs better than commodities and cash.

So should you ignore all other asset classes besides stocks and other high-performing assets? Of course not.  However, it might mean that, if you have a long enough time horizon, you have a decent chance of earning higher returns if you own a higher allocation of stocks.

As you can see in the second chart, blended stock portfolios perform the best over a longer time horizon, but they can be volatile in the near and medium term.

Most investors should still hold both and rebalance periodically, which raises the odds of experiencing a smooth investment ride while you wait for the asset returns to sort themselves out over time.  Additionally, it is important to adjust your allocation as your goals and time horizon change.  For example, as you accumulate more wealth and get closer to retirement, it may make sense to reduce your allocation to stocks. 

Key Takeaways

Regardless of your age or investment perspective, the data indicates that investing in the capital markets yields higher returns than waiting on the sidelines.

Market participation is one of the most powerful wealth-building tools in the world, and you certainly don’t want to miss out on building a sustainable future.

Other Blogs

You Might Also Like

Why Investing Early Is the Key to Achieving Financial Goals

For long-term investors, knowing the difference between what can and cannot be controlled is the key to both financial success and peace of mind. While all investors would like to believe they can predict or even control the direction of the market, experience teaches us that this is difficult to do. Constructing and managing an appropriate portfolio, while making strategic and tactical allocations based on market opportunities, ideally with the guidance of a trusted advisor, is often the best approach. However, while following markets and maintaining perspective on the economy is important, an even more fundamental key to success is simply to start saving early, stay invested, and remain focused on long-term financial goals. What can investors do to benefit from these principles today?

Read More »

7 Market and Economic Insights for the Second Half of 2023

Major stock market indices made significant gains in the first half of the year due to improving inflation, slowing Fed rate hikes, the absence of a recession, a more stable banking sector, and a strong rally in tech stocks. The S&P 500 has climbed 16.9% with reinvested dividends this year, while the Nasdaq and Dow have returned 32.3% and 4.9%, respectively. Markets have recovered much of their losses from last year with the S&P 500 now 7% from its all-time high.

Read More »

General Disclosure

This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. This presentation may not be construed as investment advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and are subject to change without notice.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2, available upon request or at the SEC’s Investment Advisor Public Disclosure site. As with any investment strategy, there is potential for profit as well as the possibility of loss.  We do not guarantee any minimum level of investment performance or the success of any portfolio or investment strategy. All investments involve risk (the amount of which may vary significantly) and investment recommendations will not always be profitable. Past performance is not a guarantee of future results.