“All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope.”

Jesse Livermore

Recently, I read that multiple studies have shown that when the stock market goes up, investors’ money flow into it. And when the market goes down, investors’ money flow out of the market.  This type of behavior would be like a shopper heading to the grocery store every time the price of produce goes up and then returning the produce to the store when it goes on sale – but the store will only buy it back at the sale price. 

This behavior of buying high and selling low results in investors market returns to be substantially less than historical stock market returns.   

Behavior Gap is the difference between an investment’s return and an investor’s actual return. The “gap” is where investors’ behavior—their actions and emotions–come into play.  Without investor’s emotion, the difference would be minimal between what the investor would have earned in compared to what they actually saw in their investment account. 

According to Vanguard founder, the legendary investor Jack Bogle, the average equity mutual fund investment gained 173% from 1997 to 2011, but the average equity mutual fund investor earned only 110% during the same period. From their analysis, this gap is directly attributed to investors allowing their emotions of “greed, fear, exuberance or despair” to control their investment decisions.  

Additionally, every year since 1994, Dalbar’s Quantitative Analysis of Investor Behavior (QAIB) has measured the 20-year average annual compound rate of return for the average large cap equity mutual fund in the U.S. and the average return realized by equity mutual fund investors.   

For the 20 years through 2007, Dalbar’s QAIB results demonstrated that the average equity fund produced 10.81%, and the average equity fund investor produced 4.48%. From the analysis, it is apparent that over the 20 year span, the average fund investor consistently realized much less investment return than the return of the average fund.   

“People have a tendency to sell at the bottom when the market is at its worst and buy at the top when the market is at its best. Inherently, this leads to poor investment returns.”

Carl Richards

Additionally. According to Dalbar, most investors took performed poorly in the second half of calendar year 2018 — in fact investors averaged a loss of 9.42% — compared with the S&P 500, which had a loss of 4.38%.  And, during October 2018, in which the S&P 500 was down 6.84% while the average equity investor return was down 7.97%; and in August, when the S&P 500 was up 3.26% and the average equity investor was up only 1.80%.  The QAIB research concluded that the average investor didn’t have much success whether the market was good or bad in 2018. 

In a January 2012 Forbes interview, Carl Richards, author of the  book, The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money, pointed out that investors are “…responsible for their behavior.”  He states that investors are responsible for spending less than they earn; to saving and investing with discipline. Further, he states that it has become easier for investors to blame banks, Wall Street, credit card companies, politicians, etc., for their financial mistakes…but blaming others does alter the impact their own behavior has on investment account. Thus, it’s better for investors to own up to their responsibility and learn from their mistakes. 

Fortunately, there are several actions investors can take to protect themselves from making emotional decisions during times of eye raising market volatility and to reduce the impact of the Behavior Gap on their investment accounts.   

• First, investors can stay true to their long range financial plan and make a conscious decision to do nothing since short term market volatility should not matter.   
• Secondly, they should never sell or have any reason to sell stocks in a down market.  If an investor’s portfolio is properly allocated and they have set aside three to six months of living expenses in an emergency fund, they should be able to ride out short term market volatility.  
• And, finally, investors can seek professional help and confer with a financial adviser. If an investor is unable to control their emotions, they should not be investing on their own.  

The Behavior Gap by Carl Richards – Four Pillar Freedom

The behavior gap refers to the gap between investment returns and investor returns. Due to fear, greed, and irrationally, most people buy and sell at the wrong times and lose money. The best investment strategy is often the simplest investment strategy.

— Read on fourpillarfreedom.com/the-behavior-gap-by-carl-richards/

Photographs depict the many wonderful sights, tastes and activities from The Grand at Moon Palace Golf and Spa Resort in Cancun. Disfrutar (Enjoy)!!!

Barron’s Big Money poll of professional investors finds a drop in the percentage of bulls from last fall. Why the pros like tech stocks and fear Tesla
— Read on www.barrons.com/articles/stock-market-big-money-poll-51556309101

Investors are four long month away from the market volatility and meltdown experienced by investors in late December 2018. During the market upheaval, prognosticators were predicting the death of the bull market, the end of global economic growth and the advent of recession in the U.S. and globally.

In short, the bears were out of their hiding place to proclaim that the financial sky was falling and that public companies would experience an earnings recession that would drive U.S. equity markets down more than ten percent from their September 2018 highs.

Granted, the U.S. equity markets did experience a significant correction that spooked even the most seasoned investors in December, the Chinese and European Union economies were were showing signs stagnation, and calendar year fourth quarter U.S. GDP grew 2.2 percent annualized. 

Today, the financial horizon reveals a much more positive disposition. U.S. public corporations first quarter 2019 earnings are beating analyst expectations, Chinese economy has appeared to bottom and is showing signs of recovery, and Europe has apparently stabilized despite negative central bank interest rates. And, on top of the many positive indicators, the U.S. Federal Reserve has adopted an accommodating policy of pausing federal fund interest rates hikes and tightening the monetary supply.

My late April 2019, the U.S. equity markets (S&P 500 and Nasdaq) have achieved new all time closing highs and the Dow Jones is within striking distance of its all time high.. Fear of missing out of the market steady rise is bringing those investor that have been sitting on the sidelines back into the market.

Believing the equity markets will continue its steady rise has investors chasing hot technology stocks and driving up the prices of recent IPO’s. Recently, Jamie Dimon, the CEO of JPMorgan Chase, was reported as stating that he believes the U.S. economy is okay citing strong corporate balance sheets, positive consumer confidence and rising income.

With all the positive news economic and equity market news, investors should exercise caution and always consider equity risk before jumping back into the revved up markets because of the fear of missing out and chasing hot technology stocks. This course of action rarely bodes well for impatient and exuberant investors. 

For the best after-tax returns, investments with the biggest tax consequences should be sheltered in tax-deferred accounts such as a 401(k) or IRA. Among these are corporate bonds, bond mutual funds, and REITs, whose income is subject to income tax rates of up to 37%. Other good candidates for tax-deferred accounts are investments that generate short-term capital gains, such as actively traded stocks. Gains are considered short term if they’re realized within 12 months, and are taxed up to the 37% income tax rate.

Meanwhile, taxable accounts should hold the most tax-efficient investments, such as tax-exempt municipal bonds and separately managed investment accounts in which a manager actively harvests losses to offset gains and minimize taxes. Other investments in this camp include stocks held for the long term and mutual funds with low turnover rates, such as stock index funds.

— Read on www.barrons.com/articles/the-best-way-to-bankroll-your-kidswithout-ruining-your-retirement-51553287755

On CNBC Power Lunch, the commentators reported that several U.S. states are experiencing a problem of excess tax revenue, which all agreed is a great problem to have.  They also reported that the states’ dilemma is what to do with the excess collected tax revenue.  While some states have decided to give the excess back to tax payers in the form of a rebate; others have decided to reduce tax rates to their respective state’s taxpayers.

Another option states have employed is to add to their respective ‘rainy day fund’ that increases their dry powder for the inevitable economic downturn.

With a growing U.S. economy hovering about three (3) percent, high employment rates creating more taxpayers and all time highs in U.S. equity markets creating capital gains, states are reaping the benefits of record high inflows of tax revenues.

While attending a recent wine tasting featuring several wines from the Tuscan region of Italy, the conversation around the table drifted towards investing for retirement.  During the table talk, someone shared that they had recently met with their financial adviser to reallocate their retirement portfolio into less risky securities such as U.S. Treasuries and corporate bonds.

Given today’s interests rates and relatively low coupon rates on most Treasury and corporate bonds, my initial reaction was that moving assets out of equities and into bonds may prove less than a wise move depending on ones short and long term goals.

The volatility the U.S. equity markets experience in late December 2018 was frightening for both smart money and retail investors.  When financial pundits and business media were proclaiming the end of the bull market and the advent of global economic recession, it is understandable why many investors “threw in the proverbial towel” and reduced their exposure to U.S. equities.

Dependent on ones short and long term goals, abandoning equities in ones portfolio of investments may be an incorrect move. If ones long term goal is to save for retirement in ten or more years, time in and staying invested in the equity market remains the best investment strategy for achieving above average returns while realizing below average risks.

Bottom line, to achieve one long term financial goals of retirement, time in the market is paramount.  From my humble viewpoint, reallocating one’s portfolio to lower return securities puts an investor at a greater risk of not meeting their long term retirement goals.

The first rule of saving and investing is to stop losing money and end bad spending habits.

It is imperative to stop doing the old, ineffective things. An investor must first identify what is no longer working and secondly, stop doing what is no longer working.

It is the presence of the of old bad habits that keeps savers from experiencing new positive financial behaviors.