A financial adviser can help take the emotion out of investing
Studies show that using financial adviser can be a good investment.
Have you ever wondered whether you really need help with your investment decisions?
If you think you can make good decisions on when to buy and sell on your own, consider that the statistics on the “do it yourself” approach are not encouraging.
Recent findings by Morningstar®, Inc., a leading mutual fund research firm, compared mutual fund returns with the gains investors actually received and found that investor returns typically lagged fund returns.1 The reason: Investors tended to move cash in and out as markets would rise and fall, often buying high and selling low.
The study covered 10 years through the end of 2012, and found that funds posted an average annualized return of 7.05%, compared with a 6.1% average return realized by investors. (Those totals factor in all stock and bond funds that Morningstar tracks. Investor returns are weighted based on asset flows into and out of all share classes of open-end mutual funds tracked by Morningstar.)
Although a gap of a single percentage-point may not seem like a big difference, it can make a significant impact over the long term, thanks to compounding. In fact, a $10,000 investment returning an average of 7.05% annually would produce a total of $19,856 over 10 years compared with $18,078 for an average annual return of 6.1% over the same period. Over 30 years, the gap becomes even wider: $78,286 for the 7.05% return vs. $59,082 for the 6.1% return.2
What is the reason for the gap between fund returns and investor returns? The difference is largely attributable to investors buying funds when times are good and then selling when troubles arise, financial researchers say. Once out of the market, investors often don’t get back in time to capture much of the later upturn in stock prices.
Stock market volatility makes the problem worse. Fear can drive investors out of the market or cause them to make emotional decisions that could have long-term consequences for their portfolios. Working with a financial adviser can help provide guidance during difficult times.
An adviser can help you:
- Develop a long-term financial plan consistent with your time horizon, goals, financial situation and risk tolerance.
- Build a diversified portfolio that’s spread among different asset classes, sectors and countries.
- Avoid making short-term decisions during volatile markets that may negatively affect the long-term value of your portfolios.
“If you’re scared, you’re likely to make poor decisions,” says Gene Stein, an American Funds portfolio manager with 41 years of investment experience. “If investors’ account values fall too much in a short period of time — six to 12 months, for example — they can be very tempted to panic and either reduce or sell their whole position. As a result, they won’t be in the market to participate in the rallies that often follow market declines.”
1 Russel Kinnel, “Mind the Gap: Why Investors Lag Funds,” Morningstar, February 4, 2013.
2 Results are for illustrative purposes only and in no way represent the actual results of a specific investment.