I have to admit, I love bacon. I mean I really love it. If it weren’t for my cardiologist and my wife, I’d have a steady rotation of bacon wrapped everything.
So you can imagine my surprise when I was scrolling through my Facebook feed and found this glorious headline, “New Study Claims Eating Bacon May Prolong Your Life.”
Hallelujah! I was filled with a new-found hope – bacon isn’t actually bad for you! My theory that there’s anti-bacon lobby spreading negative propaganda all these years was starting to pan out. After my two second mini-celebration, I saw the next headline that Facebook tossed into my news feed: “Study: Pancreatic cancer risk increases with every 2 strips of bacon you eat.”
My bacon jubilation was squashed.
My point here is obvious; I and millions of other people are persuaded by the media. It’s natural and it’s normal.
When it comes to investing, the same holds true.
Over my 17 years as a Financial Advisor and Chartered Retirement Planning Counselor, I can tell you without a doubt that I’ve fielded more questions from investors that were spawned by the media than any other source. And the impact on investors is brutal. According to Dalbar, the 20-year annualized S&P return was 9.85% while the 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%!
Why the gap? Is it because investors aren’t educated enough? Is it because investors don’t know what they are doing? Is it because there aren’t enough investment calculators available? Is it fees? Nope.
The reason investors have underperformed is due to behavior…more specifically, bad behavior. Two specific psychological phenomena happen to investors when markets underperform and the media starts on a rant:
Loss Aversion – The fear of loss leads to a withdrawal of capital at the worst possible time – also known as “panic selling”.
Herding – Doing what everyone else is doing which can lead to “buying high and selling low.”
Even despite an investor’s best intention to behave correctly in both good times and bad times, Loss Aversion and Herding are primal forces. These two forces were super helpful back when man was learning how to make fire and trying to survive each day. They don’t translate as well when it comes to being an investor and unfortunately can be attributed to nearly 5% of lost return over the last 20 years.
An investor has to find a trusted advisor they can usher them through the next 20 years. So be it bacon headlines or financial journalism, be diligent in what you are reading – garbage in is garbage out.
Your cardiologist and future retirement will thank you in advance.