Episode six of At The Rotterdam explains one of the many reasons why retail investors underperform the indexes.
While the US stock market has returned around 10% per annum on average for most of history, retail investors – according to one study - earned less than 2%, even less than inflation.
Fees are partially to blame. But one of the less obvious yet likely culprits is impatience.
Investors have been spoiled for most of the last 14 years, as the financial markets have generally been up only. Yet studies show that investors spend around three quarters of the time in a drawdown situation: Showing a portfolio loss from the previous highs.
Bear markets can be long and depressing. Yet 65% of the time investors are in a drawdown of 20% or more. Holding while the markets fall is costly, emotionally as well as financially. This is the cost of holding stocks for the long run.
It’s always darkest before the dawn, and those who are not used to being underwater are more likely to sell at the bottom. But that has historically been a mistake.
We go through the numbers and show that US stocks have killed it in the long term, even if most of the time inventors don’t feel it. Hanging in has been the right call, even when it hurts.
Let’s just take the NASDAQ. It took 15 plus years to hit a new all-time high after the dot-com crash. But after it did, it went another 3.5x from there. Amazon bottomed down almost 95 percent. It took 10 years from its previous top to hit a new ATH. And then 18x’d from there.
Even the best winners in hindsight spent a great deal of time in a loss situation before the exponential gains arrived.
Patience has historically been greatly rewarded.
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