Fasten Your Seatbelt? Or Jump?
This slide shows the difference in what the average actual investor earned invested in the S&P 500 vs how the S&P 500 performed. In theory they should be exactly the same. So why the difference?
The difference is due to poor investor behaviour, in other words, pulling money out when performance has just been down and putting money in just after things have improved or performed well. Had the average investor left his money invested through the cycle, he would have earned, on average, 6% more over the last 30 years! That is massive.
Assume two investors started with the same lump sum of $100 000 30 years ago. The 1st left his money invested for the full period. The second moved to cash and reinvested at the same points as the average investor over that period.
The 1st would have a balance of $2 322 512 while the second would be sitting with $364 837.
The message is simple – no one has the crystal ball to determine the best moments to pull out and the best moments to reinvest, but history will tell you that staying invested is far better than attempting to time the market.