I wanted to start this New Year with a series on behavioral finance; hopefully making a resolution to push back on few biases that we may have that can hurt us in the long-run.
According to a study from a few years ago, the average return of an investor in a blend of stocks and bonds over the past 30 years is 1.9% (Hanlon, 2014), while stocks and bonds have returned much higher during that time. Why is that? Some may blame it on bad luck. And while that may be true to some degree, the reality is that it has much more to do with bad behavior than bad luck! I want to address some of the mistakes we make and the ways to best avoid them in this four-part series.
Our experiences shape our thoughts and ultimately our behavior more so than what we learn. And those experiences vary widely by individual. Those who had good experiences with investing in early adulthood are more likely to save and invest than those who didn’t. And while long-term averages tend to work in favor of the investor, then 10-year period when starting may vary widely.
Estimated value of $1,000 invested in S&P 500 over the first 10 years of adulthood* (Kitces, 2018)
Late Baby Boomer – $5,000
Early Boomer - $2,000
Late Generation X – less than $1,000
Early Generation X - $5,000
Early Millennial - $2,000
It’s quite easy to see why there are large generational differences in opinion on investing. It’s important to realize that our experience may lend us to be overly optimistic or pessimistic, both of which can hurt performance and keep you from your goals.
Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.
*Adulthood is considered ages 22-32. Since each 10 year period is different, the results were based on estimated returns for each age group over a sample decade.
Hanlon, S. (2014, April 24). Forbes. Retrieved December 10, 2018, from Forbes.com: https://www.forbes.com/sites/advisor/2014/04/24/why-the-average-investors-investment-return-is-so-low/#27927199111a
Kitces, M. (2018, October 3). Kitces.com. Retrieved December 10, 2018, from Kitces.com: https://www.kitces.com/blog/birth-year-generation-experience-stock-market-investing-baby-boomer-gen-x-millennial-returns/