Closing at 1,561 on March 15, the S&P 500 Index is approaching its record high closing price of 1,565 set on Oct. 9, 2007.
Including the impact of dividends, an investor in the S&P 500 Index had already surpassed the 2007 high value of his or her investment a year ago. However, investors who broke from the discipline of a long-term strategy and periodic rebalancing likely remain far below their investment’s high water mark. The recent financial crisis provides a great example of a recurring phenomenon in many market environments: the biggest impediment to an investor’s success is often the investor himself.
Why? We are inundated by the financial press with information that either stirs up euphoria or incites panic. The urge to react is human nature, but usually counterproductive. For an example, look no further than 2012. The global economy was showing signs of slowing down, many financial pundits predicted a lackluster year for stocks and a Euro zone breakup, and uncertainty regarding U.S. elections and the “fiscal cliff” was plentiful. A reasonable person weighing the evidence might elect to sit the year out. Yet, despite this “wall of worry” the S&P 500 posted a return of 16.0% in 2012 and the MSCI EAFE Index (international stocks) earned a 17.3% return.
One of the most sacred rules of investing – and the hardest to follow – is to maintain discipline and follow an appropriate long-term strategy. Securities markets are incredibly efficient at processing massive amounts of information and reflecting that information in prices. So as the pundits debate the implications of new market highs or any other topics of the day, realize that the market has already assimilated this information and don’t overreact to old news. Unless you can reliably predict the next big news story before it happens, you will be better off staying on strategy.
Focus your time and energy on things you can control, like properly assigning investments between your IRA and taxable accounts to boost after-tax investment returns, optimizing your Social Security claiming strategy, and considering a host of other financial planning topics that can add tremendous value.