We’ve talked about this before – on a few occasions – but it never hurts to revisit timeless truths that help keep things in perspective. Last year, a survey by Allianz Life Insurance Company of North America reported that more Americans would rather die than run out of money in retirement. While neither is a pleasant thought, at least the latter can be avoided.

Making your retirement savings last for thirty years is no small task. Assuming you have saved enough during your working years to be able to maintain your lifestyle, you have to have the know-how and gumption to manage this money in the distribution phase. And that’s when it counts. Make the wrong moves, and there’s a good chance you’ll run out of money before you run out of breath.

There are two culprits to sabotaging your retirement: the sequence of returns your portfolio experiences and reverse compounding. You can’t control the sequencing of returns; the market is going to give you what it gives you. You can, however, avoid reverse compounding – despite what the market does – if you understand this simple lesson: Selling assets for a loss so that you can spend cash will put you in the poorhouse.

In other words, if the market is down and you’re selling assets to sustain the same withdrawal rate, the negative sequence of returns coupled with the losses will create a huge reverse compounding problem. And here’s the kicker: the effects are far worse if you’re in the early stages of your retirement. Take a look:

Both portfolios start with $1,000,000 and have 5% of their first-year account value taken in withdrawals, adjusted by 3.5% for inflation each year thereafter. Both experience the same returns, with a final average of 6.5%, but the sequence in which they occur has been flipped. Portfolio X starts with early losses; Portfolio Y begins with early gains. The withdrawal rate is constant for each, no matter what their respective returns are, and for Portfolio X, this proves to be catastrophic. The portfolio has been spent by the age of 84.

Portfolio Y reaches age 100 with $1.2 million left. What’s the massive difference and how could Portfolio Y have managed a better outcome? Reverse compounding. We’ve all heard of positive compounding, but it can work the other way, too. Because Portfolio X experienced losses early on, the portfolio could never recover those losses. Add the constant withdrawal on top, and it’s easy to see how this person ran out of money.

This example shows you how your retirement can become a crapshoot if you’re not careful. The reverse compounding that occurs when assets are liquidated at a loss to raise cash, is what creates the sequencing of returns problem. Take away the need to sell and you remove the biggest flaw in current retirement income models. The good news is that you don’t have to rely on a stellar sequence of returns to ensure a successful retirement.

Bear markets are inevitable throughout your retirement, so how do you survive? A cash flow investment strategy will do a better job at protecting you from the sequencing of return problem than capital appreciation will. Living strictly off the income your portfolio generates, rather than selling assets to raise cash will eliminate the risk of reverse compounding.

This is a relatively new problem, seeing as the generations before us didn’t have to self-fund their entire post-working life, but your retirement doesn’t have to be left to chance. With this knowledge, the right investment strategy, and the fortitude to do the right thing – even when it’s hard and everything is incredibly uncertain – running out of money isn’t an option.

The debt problems, both here and abroad, have been stirring investors, along with Washington’s inability to do much to resolve anything lately. Then, Standard & Poor’s lowered our country’s credit rating over the weekend. Economists are predicting all kinds of bleak outcomes, and as a result, the market took a considerable hit.

Investors are spooked this week with Asian and European exchanges down sharply and the Dow tumbling more than five percent. “Markets are either driven by fear or greed, and we’re definitely in the fear period right now,” says Matthew Rubin, director of investment strategy for Neuberger Berman, quoted in the Wall Street Journal.

If you’re a long-term investor – and you should be, considering the average life expectancy for a 65-year-old couple is 30 years – you have to learn how to weather the dips in the market. Moving up and down is what the market does; that’s its nature. No one can consistently and accurately time the market, so getting out and back in when your emotions (or your software or your financial advisors) tell you to is a fool’s game. There is no lighter way to put it.

Market volatility in itself will not ruin your portfolio. Sure, it may temporarily lose value, and your retirement may be delayed if a bear market just happens to occur at the same time you’ve planned to resign; however, acting out of fear and selling in a panic would lock in those losses permanently and doom your golden years.

Let’s not forget that most of the losses incurred in 2008 have now been regained. The market rallied for over 24 months to bring values back up, but all those who sold out in 2008 missed the mark and were sorely regretful. It’s easy to get caught up in short-term problems, but remember that markets are cyclical. Historically, for every downturn, there has been an upswing.

The lesson here is that the market is going to do what it’s going to do. The question is: What are YOU going to do?

In order to live comfortably, you must do the thing that you fear, which is put your capital at risk – because profit is the reward for risk. Without risk, there is no risk premium. And you must earn the risk premium in order to be able to live when you no longer have a paycheck. In spite of what your emotions are screaming, there is much less risk in the stock market for the long-term investor holding a reasonably diversified portfolio. Market risk only exists in the short term.

Therefore, your choices are really quite simple. In order for you to avoid running out of money, or at least purchasing power, you must commit a substantial portion of your assets to an equity-based investment strategy and keep them there for the long term – through the ups and downs and all of the panic buying and selling. We firmly believe the only way to make the required return is to always be in the stock market, actively managing a portfolio of quality companies over your entire lifetime and that of your spouse. Not market timing. Not stock picking.

Regardless of what the market is doing, consistency in your investment strategy is going give you the highest chances of achieving the desired result. And, regardless of what the market is doing, you have to be able to control your emotions and avoid knee-jerk reactions.

Discipline is key.

Sensationalism in the media turns everything into a crisis these days. Fear is human instinct, but you don’t have to give in to it or act upon it. Selling when things are bad and buying when the market is doing well is the exact opposite of what you should do if you want to be successful. In fact, this is one of the most common of irrational investor behaviors.

With all this in mind, there are other things you can do to weather the storm and ease your fears when CNN is telling you that we’re on the verge of another recession:

1. Turn off the TV. If it’s really giving you grief, eliminate the noise.

2. Don’t forget about your brain. Think logically. Remind yourself of the tried and true fundamentals of personal finance and investing. (i.e.: Bear markets will happen – about once every 5 years. Invest for cash flow. Keep a long-term outlook. Don’t sell assets at a loss and incur reverse compounding. Buy low, sell high. Etc…)

3. Be sure you’re living within your means. Don’t be afraid to spend money, but don’t overextend, and be careful with your credit cards.

4. Maintain liquid assets to fall back on. A separate FDIC-insured savings account with at least one year’s worth of expenses should be set up for an emergency fund. This money is to be used only in the event of income disruption. In retirement, this means the cash can be used to fill any gaps and smooth out the ups and downs of the market when your portfolio does not produce the level of income that you need.

5. Secure the proper insurance coverage. Depending on your age and stage of life, you should conduct an insurance review and make sure that you have the right kinds and plenty of it.

As stated before, market dips create huge potential for some of investors’ greatest opportunities. Warren Buffett once wrote to his shareholders, “We have usually made our best purchases when apprehensions about some macro event were at a peak.”

So, don’t panic. In this moment, remain rational and calm because you know the truth: fear is your friend.

by Jesse Anderson, CFA

Recent market volatility and declines have left many investors feeling anxious. Hopefully, after weeks of debate, Congress has set us on a path toward improved fiscal discipline. That action will not erase many years of irresponsible spending, and as a result, Standard & Poors lowered our country’s credit rating over the weekend.

Many of you may be asking: What does all this mean and how will it affect our investment strategy? We continue to stay strong in our investment philosophy. Generally speaking, this is very similar to the distractions we encounter on a regular basis. In just the past few years we’ve dealt with a housing bubble, financial crisis, and numerous European downgrades and bailouts.

All these issues are what make the stock market unpredictable, which is one of the primary reasons for creating and continually refining the Snider Investment Method. In times like these, discipline becomes critical. We must remove the emotions from our investment decisions. (Click here to read an article that discusses current investor psychology and its effects on the markets.)

We’ve built a strategy to make the most of these situations. With our cash reserves and dollar cost averaging, we strive to smooth out the bumpy ride of the short-term movements in the market. We understand that it can become frustrating to sit through the volatility and nerve-racking headlines. However, we continue to believe that the Snider Method can keep meeting its long-term objectives, and we feel it still gives us the best risk/reward balance for long-term investing even under the current market conditions.

(Also, here is a good article that discusses the current market conditions compared to our last market meltdown.)

President Ronald Reagan stated in 1983, “The full consequences of a default — or even the serious prospect of default — by the United States are impossible to predict and awesome to contemplate.”

On Aug. 2, the U.S. Treasury will no longer be able to pay our nation’s obligations. Congress is at an impasse, essentially faced with two immediate choices: raise the debt ceiling or default.

Neither is an acceptable solution, and with this looming deadline, both sides of the table are working under enormous pressure to bring about some positive changes in fiscal policy. Still, the wide division between the House of Representatives and the Obama administration has created a great deal of uncertainty, which leaves us all justifiably concerned.

We always strive to position ourselves as a resource to provide valuable information and discuss the issues that are most important to you. Although this crisis du jour is certainly concerning to us, we feel it is just that – the hot-button issue of the moment. There will always be something making the news headlines. Yesterday, it was soaring food and energy prices. Today, it happens to be the nation’s debt and deficit. Who knows what the media will harp on tomorrow.

Whenever news comes out of Washington, we can reasonably expect volatility in the markets. Many investors associate volatility with a declining market, but the truth is that we do not know exactly what direction things will go, nor can we predict the magnitude of the swings. It seems that uncertainty has become a constant companion in the 21st century, but when it comes to our investment strategy, we stick to what we know.

We hold fast to our investment philosophy through the good times and the bad, the steady and the volatile. And what we know is this:

- No one can consistently and correctly time the market.
- The Snider Investment Method® is a long-term strategy, designed to sustain 30 or more years of retirement in a broad range of economic conditions; therefore, we do not make short-term tactical moves.
- Fear and greed cause investors to make irrational and often destructive investment decisions. We stick to the rules of the Snider Method regardless of the “noise.”
- Volatility is a necessary component of an investment strategy that is designed to produce a reasonable reward. It is the risk-return tradeoff that most investors must make in order to meet their objectives.

We don’t know what’s going to happen in the weeks to come. Democrats and Republicans might reach some sort of compromise. Government may shut down. We might miss a few payments. Or, we might just raise the debt ceiling like we have nonchalantly done over the last couple decades. We can speculate like the rest, but at the end of the day, that’s all it amounts to – speculation.

The uncertainty surrounding the country’s debt problem and the resulting volatility have begun to stir investors’ fears. While it’s human to feel fear, it is imperative that you do not give into it or act upon it. Fear is actually an ally of the long-term investor. For those who can manage their emotions and hang tight, therein lies huge potential to capitalize on the aftereffects of the panic selling that can ensue by those who aren’t as steadfast.

The optimum response to fear and the issue du jour – no matter what it may be – is to ignore the hype, recognize a means for great opportunity, and stick to your long-term investment approach.

And remember: this, too, shall come to pass.

According to a new survey released this week by Spectrem Group, a Chicago-based strategic consulting firm specializing in the affluent and retirement markets, only 47% of investors with a net worth over $1 million said they prefer to be actively involved in the day-to-day management of their investments.

It appears that more high net worth investors are taking a hands-off approach and turning toward their financial advisors to do all the heavy lifting – and rightfully so. The financial crisis has left many investors worn out after years of strategic maneuvering and sleepless nights. This trend is supported by the fact that the number of do-it-yourself-ers is down from 65% in 2010 and 69% in 2009.

Spectrem Group President George Walper, Jr. said in the report, “Wealthy Americans may simply be experiencing investor fatigue, prompting them to pull back and allow their advisors to take the lead in managing their assets.”

The survey also found that only 45% of those with a net worth between $1 million and $5 million still feel that day-to-day portfolio management is something they enjoy and don’t want to give up, a steep decline from 64% in 2009.

At Snider Advisors, we’ve always been proponents of being fully involved in your investment management, whether you do it yourself or hire professional services. You don’t ever want to be in a situation where your advisor is making decisions with your money that you are not aware of or that you don’t understand.

For many investors, self-management makes sense because they can save themselves the fees that are attached with hired help. For others, especially those with a higher net worth, professional asset management is the answer, and these folks can save themselves the time, anxiety, or irrational emotional behavior that managing a large portfolio may bring.

In times of economic uncertainty, it is especially important to keep your emotions in check. Professional wealth management takes this element out of the picture, and you may fare much better with a consistent strategy employed by an unbiased advisor versus being on your own.

Asset management is also a good idea for those who are unsure if they can weather the storm. The survey above shows that many investors found themselves run down by their investments. At the point that you are fatigued, you’re more prone to error, poor judgment, fear, and a host of other threats to your financial well-being. Turning things over to an advisor can be a huge relief of that burden, but don’t wait until it’s too late.

Snider Advisors offers professional Asset Management services for all these reasons and more. We currently manage approximately $87 million for clients who seek the power of the Snider Investment Method® in their portfolio. We also help with distribution strategies and look for opportunities to minimize taxes through tax-loss harvesting, Roth IRA conversions, and other strategies where appropriate. As part of this service, you will receive monthly and quarterly performance reports as well as an annual review. We highly encourage our Asset Management clients to meet with us personally on a periodic basis because we want you to be fully confident in how your money is cared for.

If you’re interested in learning more about Asset Management with Snider Advisors, visit this link or contact Josh Stelzer at (972)746-4291 or jstelzer@snideradvisors.com.

I was reading an article on Yahoo! a few weeks ago and author Mark Patterson closed his piece by saying, “The pain of financial discipline will be far less than the pain of retirement regrets.” The statement really struck me, and I started thinking about how many retirees look back on what they could have – or should have – done and have regrets. Do you have things you wish you could go back and change?

Save more.
Spend less.
Start sooner.
Plan better.
Retire later.
Learn more about personal finance and investing.
Get proper insurance coverage.
Wait longer to take Social Security benefits.
Invest differently.

And the list can continue. Hindsight is 20/20, but by the point you’re having regrets, it’s often too late. Did you retire right when the stock market plunged and move all of your assets to cash out of fear, permanently reducing your retirement savings? Did you take your Social Security right at 62? That’s a lifetime decision that you can’t go back and undo. Did you procrastinate on getting that long-term care insurance? Now, you’re declined and left with a big problem that could have had a simple solution had you not put it off.

Time is of the essence, and it is vitally important that the decisions you’re making now will best serve you in the long run. When planning, you have to keep your focus on the big picture and remember that no matter how old you are or where you find yourself in life, you will always be financially responsible for the future you. If you could talk to the older person that you will be in ten, twenty or thirty years, what would you tell yourself? Are you going to have regrets?

Jim Rohn famously quoted, “Discipline is the bridge between goals and accomplishment.” There are always exceptions, but more often than not, success requires discipline. A high school student knows that in order to get into a top university, he or she must make good grades and be involved in extracurricular activities. Then, to get a good job and be successful in the real world, that college student must be disciplined in his or her studies, perhaps also juggling a job or missing social events – all this to prepare them for a successful transition into adulthood.

You can think about retirement the same way. Retirement isn’t just about packing up your office and setting sail on a cruise around the world or playing tennis at the country club every day. It’s a life transition. You will have to spend your working years preparing yourself for that transition, and it will require a great deal of discipline in order to be successful.

This means consistent savings. This means more savings. You may have to cut discretionary items out of your budget, scale back, or give up some of the luxuries you enjoy. Not having a housekeeper might be a hassle for you, but not having groceries when you’re 85 is far worse. If you and your spouse do not have a comprehensive financial plan, you absolutely need one. Don’t leave any holes or expose yourself to unnecessary risks.

Don’t put important financial ‘to-do’s on the back burner. Invest for your objectives, risk tolerance, and time horizon. Not your financial advisor’s. Not your neighbor’s or your coworker’s. If you need your portfolio to produce a consistent monthly income for you after your paycheck stops, you better invest it to do just that. Don’t stall paying off high-interest debts. Create a withdrawal strategy. Evaluate your tax situation.

When you are working, you need to be covered by a solid disability insurance policy. If you haven’t revisited your will in several years, meet with a competent estate planning attorney to make sure it is up-to-date. Don’t procrastinate on applying for long-term care insurance; waiting may mean you’re no longer insurable or the premiums have become unaffordable.

Become financially educated so that you can make the most informed decisions. It’s your money and your life. Jim Rohn also said, “We must all suffer from one of two pains: the pain of discipline or the pain of regret.” Which one will be yours?

Every 8 seconds, another Baby Boomer turns 65. Of the approximate 79 million Boomers, it’s likely that 53 million of them will need some form of long-term care during their lifetime and that at least 26 million will need to be in a nursing home. However, according to the American Association for Long-Term Care Insurance, only 8 million Americans have a long-term care insurance policy.

With nursing home costs averaging close to $80,000 a year and so few people insured, the potential financial impact to is staggering. The long-term care insurance industry is well aware of the gap between the number of people who will need care and the number of people who are buying insurance. Over the next few years, there is a good chance we will see many changes as insurers work to offer long-term care products that appeal to Baby Boomers and more effectively meet their needs.

Long-Term Care Hybrid Plans

One such change is the introduction of hybrid plans, which link long-term care insurance to another product like life insurance. Many companies, including Lincoln Life, John Hancock, and Genworth already offer hybrid plans. Others, like Prudential, are working to offer similar plans in the near future.

Although each company’s plan is unique, they all basically work like this – you pay a one-time, upfront premium. If you need care, you can access long-term care benefits. But if you never need care, your beneficiary will receive a death benefit. Most hybrid plans also pay a reduced residual death benefit even after you’ve exhausted your long-term care benefits.

No Loss of Premiums

Anyone who has ever considered buying long-term care insurance has wondered, “What happens to the premiums I pay if I never need long-term care?” With a traditional long-term care policy, unless you add a Return of Premium rider, if you never file a claim, you lose all the premiums you’ve paid. But the most appealing feature of hybrid plans is they avoid the use-it-or-lose-it conundrum – either you will receive long-term care coverage or your designated beneficiary will receive a death benefit.

Protection from Rate Increases

Understandably, one of the primary concerns about long-term care insurance is whether or not the premiums will increase over time. With traditional long-term care plans, it’s possible that the rates will increase. (Long-term care insurance premiums cannot go up just for you – they can only go up for a group of policyholders and only after the insurer can justify the increase to state insurance regulators.) The advantage of the hybrid plan’s single premium is that it is exempt from future rate increases. While rate increases are never pleasant, they can be particularly stressful for retirees, who may have a limited source of income.

Possible Tax Benefits

Although the one-time premium has certain advantages, it can also be somewhat daunting. However, if you currently have a life insurance policy (or an annuity) that no longer meets the needs of your retirement plan, you may be able to take advantage of a 1035 Exchange. Under the Pension Protection Act, a 1035 Exchange allows you to exchange one insurance contract for another without incurring taxes on the gains in the first contract. This means you may be able to use the cash value of an existing policy to pay for a hybrid plan – tax free.

A word of warning: 1035 Exchanges require analysis; you always want to make sure you’ve met with a professional who can help you to evaluate your situation. If you do decide to move forward with an exchange, be prepared for a wait. The process can be quite lengthy.

Hybrid long-term care insurance plans can be confusing, are not appropriate for everyone, and are definitely not one-size-fits-all products. Your best bet is to consult with an insurance agent who can help you learn more about your long-term care options and find the best solution for your unique situation.

One last note – this article only provides an overview of hybrid plans – and quite frankly, because of limited space, only scratches the surface. If you’d like to learn more, give our long-term care specialist a call at 214-446-8538 or send Shelley an email(sseagler@snideradvisors.com). I’m happy to answer your questions and direct you to additional resources.

As an investor, you need to be aware of the underlying biases and human tendencies that can influence your behavior and cause you to act irrationally. In the most recent blog post, we discussed how emotions and psychology often have a negative impact on our investment decisions. We took a closer look at recency bias and herd mentality, two common phenomena in the field of behavioral finance. This week, we’ll examine two more investor flaws - gambler’s fallacy and confirmation bias.

Gambler’s Fallacy

With the gambler’s fallacy, an individual falsely assumes that a series of random events will determine the outcome of a subsequent event. This idea is erroneous because past events do not change the probability of a certain outcome in the future.

For instance, consider a roulette wheel that has landed on black for the last 10 spins. Under the gambler’s fallacy, a person might predict that the next spin is more likely to land on red. This line of thinking represents an inaccurate understanding of probability because the likelihood of either color is generally 50 percent. Each spin is an independent event, which means that any and all previous spins have no bearing on future spins.

It’s important to understand that in the case of independent events, there is no such thing as an event being “due.” An event is not more likely just because it has not happened for a long time. Relating to investing, people often try to predict patterns and then buy or sell based on how they think that pattern will play out. Since these events happen entirely by chance, the pattern has to end eventually.

To get a better understanding of how random the market is, take a look at the Callan Periodic Table of Investment Returns. Sure, you might be able to see some short-lived trends; the key is recognizing that no pattern can be predicted with any kind of consistency. It’s easy for our brains to trick us into confusing skill with luck.

(Click here to see enlarged image.)

The experiment above illustrates this clearly. On the left you will see that 50 percent of actively managed mutual funds beat the S&P 500 in one year. That drops to 27 percent of the funds beating the S&P 500 for two years in a row. Only 3 percent could beat the S&P 500 for five consecutive years. Compare this to the results on the right, which are coin tosses. The numbers – and the chances – are nearly identical.

There’s a reason that investment disclosures warn us: Past performance is not indicative of future results.

Confirmation Bias

Sometimes your perceptions are not really a true representation of reality. This doesn’t mean that there is something wrong with your senses, but rather that our brains have a tendency to bring out certain biases when processing information and events. People have a habit of filtering and favoring information that supports their decisions and beliefs, while avoiding or ignoring that which does not. This kind of selective thinking is known as confirmation bias.

A good example of confirmation bias can be seen in your news preferences. Do you primarily watch one major news network versus another? In fact, do you strongly dislike or disagree with the others? This is because your programs of choice confirm the beliefs that you hold and the other channels and commentators present contrasting views. It is human nature to avoid contradicting opinions, but sometimes, it can be detrimental.

In investing, the biggest problem with confirmation bias is that it leads to a lack of objectivity – and when it comes to your money, you absolutely cannot afford to be biased. Rational market participants, confronted with a crippled investment strategy, would simply go find something better, right? Sadly, because of their confirmation bias, many people do nothing but cling irrationally to outdated ideas that aren’t working for them.

It is your job as an investor to be able to recognize your biases. Play a “devil’s advocate” role if you must. Ask yourself: Does this strategy truly match my objectives, risk tolerance, and time horizon? Am I, or my financial advisor, making emotional decisions that are negatively affecting my portfolio? Is my approach working for me? If your answers point to irrational behavior, it’s time for a new outlook.

For more interesting reads on behavioral finance, check out Kim’s Recommended Reading List, which includes these relevant titles:

- Irrational Exuberance by Robert J. Shiller
- Mean Markets and Lizard Brains by Terry Burnham
- Investment Madness by John R. Nofsinger
- The Drunkard’s Walk – How Randomness Rules Our Lives by Leonard Mlodinow
- The Fourth Turning by Strauss and Howe

When it comes to investing, emotions and human nature often influence our decisions, causing us to behave imprudently or illogically. Why does this happen? Behavioral finance is the study of psychology as it relates to the fields of economics and finance to explain why and how people make irrational financial decisions.

For years, it was assumed that “conventional” economic theories best portrayed how investors conducted themselves – reasonably and predictably. In the early 1970s, however, academics began to identify several anomalies that traditional financial theories could not explain. These psychologists and economists found that, in reality, the world does not conform to idealizations and that market participants often act very unpredictably.

Emotions are the investor’s curse, and if they’re left unchecked, they may get the best of you. Below, we examine two common investor pitfalls and a couple of the underlying reasons that some of us behave irrationally – and often against our best interests.

Recency Bias

Have you ever seen a bad car accident on a route that you regularly drive? You probably drove pretty carefully in that area the next time you passed through. This is an example of the recency effect. We tend to place a higher value on events that have occurred most recently than those events that have taken place in the past. You’ve driven on that road countless times without thinking twice about your speed, yet now that the accident is at the forefront of your mind, you’re extra cautious.

The recency effect is the tendency to remember recent observations and experiences more vividly and then allow that information to dictate your actions or cloud your judgment. Unfortunately for investors, recency bias can hinder your ability to make wise investment decisions when it comes to your long-term plans.

Case in point: the latest financial crisis. When the stock market lost nearly half of its value in a very short period of time, investors panicked. Nevermind that we had a bear market nearly as bad after September 11th, 2001 – or any of the other downturns that have occurred about twice a decade for the past 100 years. Don’t believe it? Check out this graph.

What resulted from all the hysteria? Recency bias caused the masses to pull out of equities. Some dialed their portfolios down to bonds, but many moved to cash. These short-sighted decisions had devastating effects for recent retirees and those nearing retirement. They had permanently limited their life’s savings to a fraction of what they had planned on to support them for the next 30 years. On the other hand, those who were able to ignore the “panic du jour” and stick to their long-term objectives experienced one of the greatest market recoveries of the century.

There is no such thing as a perfect investment, and there never will be. No matter what you’ve chosen to do, there will be times when it will be painful. It’s important to keep the big picture in mind and not lose sight of your goals. The four most dangerous words in investing are: This time it’s different. If you need to reevaluate your strategy because your investments are inappropriate or you have a better alternative, then do so. If you’re acting based on rash emotions, it would serve you well to learn something from history.

Herd Mentality

It is thought that the human brain is hardwired to “follow the crowd.” Herd mentality is the tendency for individuals to adopt certain behaviors or follow the trends of a larger group, although individually, these people may not necessarily make the same choices. After all, we’re prone to believe that if everyone is doing it, it must be right. Even if you are convinced that a particular idea is irrational or incorrect, you might still follow the herd, believing they know something that you don’t.

DALBAR is a research firm that studies the Quantitative Analysis of Investor Behavior. They produce an annual report that examines how behavior and emotional investing have affected investors’ returns compared to the S&P 500 for a 20 year time span.

In this graph, you can see that the S&P 500 averaged 8.2 percent. The difference between the S&P and the average equity mutual fund return is essentially management fees. Now look at the disparity between what the mutual funds did versus the investor. The average equity mutual fund investor only got 3.17 percent, barely beating inflation.

Why? Simply put, it is the constant buying and selling that is driven by investors’ fear and greed. The lesson here is that if you do what everyone else is doing, you’re going to get what everyone else is getting. Most Americans need a whole lot more than 3.17 percent!

To conclude, the unofficial definition of insanity is doing the same thing over and over and expecting a different result. If you’re letting your emotions and biases interfere with your investment decisions, the rational solution is to find a strategy that completely removes this element. It’s time to stop going in circles.