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The Last Four Years…How Behavior Drives Results??

The Last Four Years…How Behavior Drives Results??

July 11, 2022

Investors who are trying to accumulate the resources necessary to make a successful transition from work life to a retirement of significance, and those already retired who are trying to maintain the lifestyle and activities they have become accustomed to, are justified in feeling frazzled and exhausted after living through the last four years.

The last four years have brought the outbreak of a global pandemic, unprecedented fiscal and monetary stimulus, two impeachments, a bitterly partisan election, massive supply chain disruptions, Russia’s invasion of Ukraine, and the worst inflation we have seen in forty years. All of this has been continually dissected and rehashed thanks to a 24-hour cable news cycle and social media spin cycle.

This has led to significant volatility in both the global stock and bond markets.  During this time, we have seen markets spike both up and down with both increasing speed and magnitude, as you can see in the chart below.


We know that investors love to own stocks when the market is moving up. It feels great to look at your account online or open your 401(k) statement and see that you have more wealth than ever before. Many times, this helps people to feel more confident and spend more. This can help drive the economy, lead to higher corporate earnings, which drives markets higher. This is known as a positive feedback loop. However, when markets move up dramatically, so do valuation measures such as the P/E ratio. People tend to forget that their future returns are inversely correlated to the price at which they are buying today. The more expensive things are when you buy, the lower your future potential returns.

Then, when the tide turns and markets take a substantial dip, emotions change quickly for the worse. During the last four years, the stock market, as measured by the S&P 500 index, has had three different drops of 20% or more. Each time the market fell, investor sentiment, as measured by the American Association of Individual Investors (AAII) fell right along with it. This sentiment index is taken from a weekly survey, and it recently showed that less than 20% of investors were bullish, fewer than at the height of the COVID-19 market drop and government-imposed lockdowns, and far fewer than at the height of the ‘07–‘08 Great Financial Crisis.

Source: Bloomberg

The negative sentiment seems extreme given that unemployment is currently at 3.6% and consumers have less debt and more equity in their homes than they have had at any point in the last three decades. What is really interesting is that low points in investor sentiment have historically led to great buying opportunities. Stansberry Research recently showed that when investor sentiment hits a 52 week low, that investor returns over the next 2-3 years generally outperform the typical market averages.

Source: Stansberry Research

Warren Buffett has said many times over the years that investors should “Be fearful when others are greedy, and greedy when others are fearful”. I have often stated that Mr. Buffett is one of the most admired but least emulated investors of all time. People love what he says and would love to have his results. However, few people do what he does. Recent data from the Investment Company Institute (ICI) has> shown substantial outflows from both stock and bond funds. This means that during the recent downturn, people are selling low…again.  

What is the result of these actions overtime? Well, a recent study by Dalbar, provided to us by J.P. Morgan Asset Management, of 20-year annualized returns, shows that almost all asset classes have outperformed the average investor. This is based on statistical data that shows when investors buy or sell. Over that period, the average investor generated in total return of 3.6% per year. This is during a 20-year time period when most asset classes, including stocks and bonds, did better than that. 

How can this be? In addition to not following Mr. Buffet’s advice, most also spurned the advice of legendary investor Sir John Templeton who told us “The four most dangerous words to any investor are- this time is different”. Successful investors need to have a combination of faith, patience and discipline to achieve their long-term goals and objectives.

The team at Impel Wealth Management will continue to walk with you as we aspire to have results that differ from the masses. We are here to help you, answer your questions and guide you through the day-to-day issues and complexities we face in the world today. It is our mission and what drives us to serve you with excellence as we continue “Moving Life Forward”. 

 © 2022 Jesse Hurst

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein.  Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.  Past performance does not guarantee future results.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.