Break Free From the Behaviors Crushing Your Returns

Steve McDonald By Steve McDonald
Bond Strategist, The Oxford Club



It never ceases to amaze me how many retirement-related articles the financial press can put out on a daily basis.

Articles titled things like “How to Make Your Retirement Better,” “How to Retire Early,” “The Two Funds That Will Solve All Your Problems,” or “10 Ways to Have a Risk-Free Retirement”… The list is endless.

Virtually all of them talk about saving more, spending less, downsizing, having a plan, diversifying… You know the gig. They’re all the same.

But never – except when DALBAR Inc.’s annual report comes out – do you ever read articles   mentioning the two behaviors responsible for virtually all the losses small investors incur…

Herding and risk aversion.

But this year’s DALBAR report just came out, and it can be summed up only one way…

Yes, we still stink at investing.

The reason? The two behaviors I mentioned (risk aversion and herding) – plus the fear of losing money and investors’ tendencies to follow the crowd!

And DALBAR, the world’s leading financial services market research firm, has 30 years of work proving that these are the biggest death traps for investors. Yet, to date, these challenges seem to be impossible to overcome. Let me explain…

Year after year after year, we watch the little guy wait until the top of the market to buy.

He does this because he sees increasing stock prices as an indication of safety. This is what’s known as “risk aversion.”

But eight years of increasing stock prices is not a buy signal!

Next, he watches all the other uninformed individual investors rushing into the market for the same reason… and he mistakenly takes that too as a buy signal. That’s “herding.”

And when the next sell-off hits, DALBAR tells us that he’ll generally fall in the next phase of risk aversion. He’ll hold his overpriced stocks all the way down.

Then, and only then, will he sell. And as the research tells us, it’s always at the bottom, and it’s always for a loss.

The little investor has the whole thing backward.

The simple fact is sell-offs are a fact of life. And if you’re going to invest, you must plan and prepare for them.

As a retiree, the way to prepare for them is to own stocks and bonds you can continue to hold through these predictable dips and valleys in the market. Selling into them is insane!

Own only high-quality companies that will be there – and will pay their interest and principal (or dividends) – no matter what the market does.

(This is what The Oxford Income Letter is all about. Marc and I design our stock and bond portfolios precisely with these kinds of goals in mind.)

These are companies that will bounce back when the turnaround happens (which it always does) and go on to new highs – which always happens too.

I call them “ironclad holdings”!

And here’s why they matter right now…

The eight-year run-up in prices and the new highs on the indexes have finally convinced the little guy, once again, that it’s OK to invest in stocks.

And it is now… when the market is soaring and he thinks “a little more risk” is OK too. But for us “over 60” folks, it never is!

To be clear, it isn’t that there aren’t opportunities in the market. There are. But they’re going to work out only if you stick with my ironclad thinking.

That’s what you’ll need to ride out the next storm, rather than cutting and running at the bottom.

Prepare yourself now for when the blood is again running in the streets. It’ll happen.

And maybe this time, you can be part of the few who will watch, rather than participate in the losses.

Good investing,