Recently, we discussed the analogy of a scuba diver becoming “blissed” out the deeper they dive, and the investor who falls into the Riskless Euphoria Zone after market prices rise sharply.
Both lose all sense of potential loss which leads them to do things they never would have done intelligently, like loading up on technology stocks in 1999 with price multiples of 75 to 1, or emotionally buying a condo in Naples, Florida in 2005 for investment purposes!
While the Riskless Euphoria Zone is a major contributor to why retirees earned 58.1% less than the stock market index and 85% less than the bond market index over the last 20 years, the opposite was an equal contributor.
Retirement Investor Performance Gap Reason #3: Panic
Retirement Investor Panic can be measured the same way as Euphoria, except in the opposite direction.
When you’re in the Panic phase, there is a complete sense that there is no price at which you can intelligently sell because it will always be lower tomorrow…and then lower again the next day after that.
You’ve watched the news. You’ve read all the articles. They’re “all” saying it so it must be true: “It will never come back. And, if it does, it won’t come back in your lifetime!”
So, the only solution is to get out.
If you’ve paid even a little attention to the news over the last six months when the stock market has resembled a rollercoaster ride at Disney World, you’ve seen this in droves. Especially on the heels of what occurred in 2008-2009.
When you’ve reached this point, you’re in the Panic Phase and history has proven that it’s extremely destructive.
At each great market bottom over the last 65 years, including the one we experienced in March, 2009, and the correction we experienced over the summer this year, the exact same headlines existed in newspapers:
“This Time Is Different”
Those four words may be the most destructive collection of words for any investor.
The reality is that it’s always different…..yet the same. The problem is that when we’re in the middle of the “fire”, it’s challenging to remain calm and rational and think long term.
In the short term, it always appears to be a completely unique period of time. And, the mass media does a great job of selling that.
However, if you study history, what you’ll find is that what contributed to most market bottoms was the same factor.
How to Think About This
What I want you to know is that I’m not suggesting that you should just blissfully invest and pay no attention to anything.
I’m also not suggesting that you shouldn’t feel anxious at times.
What I am suggesting is that the difference between getting market returns and the returns earned by the overwhelming majority of retirees over the last twenty years, which were 58% to 85% less than market index returns, is NOT due to the market.
If it was due to the market, everyone would earn what the market has produced which is extraordinary long term returns.
But, the average retiree earned 58.1% less than the stock market index and 85% less than the bond market index over the last 20 years.
The question you have to ask yourself is WHY.
And, the answer is it’s due to investor behavior.
In other words, what retirees do as opposed to how markets perform, which is 100% in your control.
That’s the good news. Each of these is completely in your control.