Why Aren’t We All Rich?
Seriously. Why aren’t we all rich?
Back in 1932 the Dow Jones Industrial Average hit its lowest point of the Great Depression on July 8th when it fell to 40.56. Today that same Dow Jones Industrial Average hovers around 33,000! If Grandma or grandpa had just socked a $1000 in the stock market back then we’d all be trust fund babies today.
What kept them away, how could they have missed this opportunity? It is obvious isn’t it? They had just seen the market drop 90% and putting whatever savings they had into stocks would have seemed insane to them.
But investors today continue to underperform the market by huge margins. According to a 2021 Dalbar study of investor behavior, Dalbar found that individual investors, over a 20-year period, averaged 5.96% return versus 7.43% return for the S&P 500.
In fact, the Investment company Institute found similar huge margins between what the market was gaining and what the average investor actually experienced for every time period of one year, three years, five years , ten years, twenty years and thirty years. It does not matter how short or how long, the market is providing returns that investors are not taking advantage of.
So the facts are right there, all we have to do to succeed in investing is to invest and stay invested. But we cant. What gets in the way?
Fear and greed. Our human emotions. We are not naturally wired to be good at investing, because on average the stock market drops 20% every five years and blows everyone out of the market. It is only natural to avoid pain, and seeing your account drop 20% hurts. So what is normal and natural for an investor when they log into their brokerage website and see their account is down 20% is to stop the pain and to sell.
That is fear.
And then greed hits when several months later they hear on the news that the stock market is up 20% and they buy the same stock they just sold a few months ago but for 20% more than the price for which they sold it. Selling low and buying high will not lead to investing success. Ever.
It is a funny thing about humans, that when Kellogg’s lowers its price on Raisin Bran people will buy more of it. But if Kellogg’s stock drops, they will wait until it is more expensive to buy it.
So we are left with two variables. The behavior of the market, which we cannot control, but has proven over time to build wealth. And the behavior of the human, which we can control, but it is not wired make rational investment decisions.
Over the coming months, I want to explore what we as humans can do to rewire our brains to invest successfully. Can disciplines like gratitude, giving and simplicity actually lead to greater wealth building?
- Jim McGuire