Great Expectations

January 27, 2012 7:54:00 AM


As the first month of 2012 comes to an end, the S&P 500 and many other global indexes have started off very strong - probably stronger than most investors would have expected.

Of course, there are several considerations in investing in the stock market when it has experienced such large moves up in short periods of time.

What are some of those considerations?

First, as an investor who subscribes to the Warren Buffett school of thought, I look forward to stock market volatility and especially corrections.

Why do I love volatility and corrections?

Because it is the volatility and corrections that create the opportunity to take advantage of continually investing into the companies I want to own at lower prices - on sale! As Warren Buffett has said, Be fearful when others are greedy and greedy when others are fearful.

Unfortunately, many investors do not take advantage of those opportunities. So, when the stock market and more importantly, the companies I own have substantial moves up in short periods, I am NOT getting the opportunity to buy ON SALE!

This means, as an investor, one must be PATIENT and take a longer term view to the investments you own. Do not get into the mode of chasing the market or piling into stocks you want to own.

Instead, be patient. But, along with being patient, be like Warren Buffett and look for businesses you want to own over time and don't get caught up in investing in the stock market.

This leads me to my point about, Great Expectations. In my experience in working with investors, I have often found investor's expectations for portfolio performance are NOT realistic!

Why are many investors expectations not realistic? Very simply, they spend too much time looking at their portfolio, worrying about volatility and yet, expect to see their portfolio go up in value every quarter and or year.

This is NOT a realistic expectation! If you are going to invest in companies and or the stock market\, there are too many variables which affect short-term performance of quality investments!

Very simply, have realistic investment expectations. You must take a longer term approach to your investments than 3 months, 6 months or even one year!

Although there are of course, no guarantees, history has shown that over time, a well-diversified portfolio has shown to provide investors with quality returns.

Unfortunately, because investors have a SHORT TERM investment time horizon, they end up having unrealistic expectations, chasing returns and end up doing more harm to their portfolio than good.

How do I know this?

Very simply, take for instance the 2011 Dalbar study where its research showed the average mutual fund investor got an annualized average return of 3.83% for the 20 years ending in 2010 - inclusive of all transaction fees. While during the same period, the S&P 500 averaged a 9.1% rate of return. That is a substantial difference!!!*

How did that happen? Simply, investors chase short-term returns and or the hot mutual fund of the day. Ironically, Dalbar estimates the average mutual fund investor holds a mutual fund for only 3.27 years!

So, while many investors will continue to have unrealistic expectations with a short-term mindset, I will continue to look for companies I want to own over time, take advantage of the volatility and most importantly, invest with clarity!


*Source - Markets never forget by Ken Fisher


Mark Pearson

Mark Pearson

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