Part 10 of the series: Rethink the Way You Invest.

Few of us remember being toddlers, but many of us sure remember raising them! “Johnny, put that down! Mary, stay inside the yard and Tommy, stop chasing Mary! For goodness sake kids, could you all please settle down!”

Sorry parents, they will never settle down but will instead become more “grown up” in their restlessness. We are all impatient in many different ways, including how we invest our money. Symptoms of this include active stock trading, incessantly switching mutual funds and following the latest “gurus”.

A few years ago, I asked one of my sons to do some research on the flows of money into and out of mutual funds, using data from the Investment Funds Institute of Canada. The results backed up observations I’ve had for years: Investors in Canada buy high and sell low. Bad idea.

Because Canada doesn’t have too many studies available on how investors do, versus the markets, I looked south of the border, knowing their investor behavior is not much different than ours. Each year, Dalbar Research measures mutual fund investor performance versus market benchmarks. The research shows that the “average” equity fund investor significantly underperforms the market rate of return.

The main reason for this poor relative performance is lack of investment discipline. The short-term focus of many fund investors compels them to buy high and sell low, and to hold funds for less than five years, on average – often shifting to yesterday’s hot performer.

I love what I do so much that I don’t actually ever want to fully retire but let’s pretend that I will. My time frame for investing extends well past the day my wife and I retire. With good health and medical advances, this could span up to half a century and our investment portfolio needs to fuel the increasing expenses of those years.

Because the history and diversification of the Canadian stock market is too thin, I took a look at the history of the United States stock market since 1926, using the S&P500 index. The compound rate of return averaged 10.23%. That’s a whole lot better than the average 3.35% for US Treasury bills! The interesting thing is that there has never been a 20 year period since 1926 where the US stock market has done worse than an average 2.2% compound rate of return. The worst return over 30 year periods has been around 7.9%.

Warren Buffett said it best: “Someone’s sitting in the shade today because someone planted a tree a long time ago.” The worst thing to do along the way is to disturb the seed or continuously try moving the tree!

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