Why It's Important to Stay in Your Seat

Investors who “stay in their seat” as Dimensional Founder, David Booth, likes to say, set themselves up nicely to achieve better outcomes. Despite all evidence to the contrary, investors have liquidated a record $135 billion from U.S. stock mutual funds in 2019*. Most of these withdrawals have gone into very low yielding money market funds or bond funds. What’s driving these seemingly counter-productive decisions?

Worries and concerns about the overall geo-political landscape might be a backdrop for many of these decisions, along with a general wariness of the stock market. Unfortunately, these choices just put an exclamation point on the already underfunded financial futures of most individual investors. I saw a study recently that estimated fewer than 11% of 50 year olds have $100,000 or more saved for retirement. Plainly put, that’s likely not within the vicinity of enough money to be on track for retirement.

Risk Perception

Many investors perceive ‘risk’ as short-term volatility in their portfolios. In reality, the only ‘risk’ that matters is not having enough money to fund your lifestyle after retirement including living cost increases.

One false narrative that seems to be repeated over and over as justification for shifting out of stocks is that the decade-long bull market is “way overdue” for a correction. Well, actually during the past decade there have already been two periods, (mid 2011 and late 2018), where the broad stock market declined by almost 20%. The purists will point out that both of these declines, (19.4% and 19.8% respectively), failed to breach the magic 20% threshold defining a bear market. In reality, that threshold is pure fiction and is touted to support the predetermined narrative of the moment.

Important Questions

Can you “stay in your seat” each and every year when from start to finish the broad market declines on average by almost 14%?

Can you “stay in your seat” when about one year in five the stock market will experience a temporary decline of about 30% that lasts for an average of 15 months?

Your responses to these two, essential questions in many ways form the foundation for your overall financial life. While short-term declines are uncomfortable they are a necessary price to pay for premium above inflation long-term returns.

If you can’t “stay in your seat” and allow the positive returns to accrue, your financial life will suffer. Ultimately you have to decide if the myriad of transient worries of the day outweigh your financial future.

Our decades of experience inform us that most individuals fight the reality that in order to secure their future they MUST accept some short-term uneasiness. If achieving your most cherished long-term financial goals matters, your course ahead is crystal clear. Start there. Ready for a real conversation?

* 2019 Refinitiv Lipper data

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