2 Tips for Long-Term Investors
We’ve all heard about how long-term investors can expect to earn 5, 6, 7, 8% per year. But why do a lot investors not actually earn those returns?
In this week’s video, Casey talks about a study from Morningstar that has repeatedly shown the negative impact investor’s decision making has on investment returns. Spoiler alert: the average investor is really bad at timing the market which leads to underperformance.
Casey also discusses whether or not long-term investors should reinvest their dividends or receive them in cash.
Both of the tips Casey offers might seem like small changes to make. But as we often say, small changes compounded over time can make a BIG DIFFERENCE.
Tune in to this week’s video to hear these tips from Casey!
2 Tips for Long-term Investors Links
2024 Mind the Gap Study – Morningstar
Diversification Always Means Having to Say You’re Sorry – Mullooly Asset Podcast
2 Tips for Long-Term Investors Transcript
This week, I’ve got two tips for long-term investors. Morningstar recently released their 2024 Mind the Gap study, which is a fantastic insight into how human behavior impacts investment returns. Morningstar measures 10 different types of mutual funds. They measure the inflows and outflows into these different types of mutual funds across… I think, they looked back over the last 10 years.
So by measuring these inflows and outflows, what they’re really doing is measuring when people are buying and selling these different types of mutual funds. Morningstar averages all of that data together and spits out an average investor return. They then compare that to what the fund earned without all of that buying and selling in there if you just bought and hold the fund.
So they compare the average investor return to what the fund itself has earned. The difference is the gap. In 2024, Morningstar found that the average investor underperformed the funds that they own by 1.1%.
This is due to timing the market and buying high and selling low, which is the opposite of what you should be doing. The gap was more pronounced in more active styles like sector funds and non-equity funds or alternative funds.
These are often used when markets are more volatile. Investors want more defensive areas of the market and they pile into it after the market has already taken a nosedive, missing the returns, selling the more growth-oriented investments low, buying the defensive ones high, and it is just a recipe for underperforming. So tip number one is to diversify your portfolio ahead of time.
The different investments in your portfolio should have roles, and if you want more defensive areas of the market, you should just own them ahead of time. But the key here is to not get greedy and sell those investments when they’re underperforming the growth side of the portfolio, because that’s just going to start the cycle all the way over again.
It’s hard to override human behavior, but diversifying ahead of time and maintaining consistent allocation to different areas of the market and maintaining that through different market environments is one way to not underperform the funds that you own. Tip number two, long-term investors should definitely consider reinvesting the dividends that you get from the investments that you own.
Can either receive them in cash or you can receive them… Or you can turn on dividend reinvest and buy more shares of the investments along the way. So some interesting stats here I’ll share with you.
DataTrek Research looked at the S&P 500 and found that the returns over the last five years… Without dividends reinvested, the return is 95.7% over the last five years. It’s pretty good. But with dividends reinvested, the return over the last five years is 112.4%, which is a 17.4% difference, 17.4%. That can make a huge difference.
It all depends on what your goals are for investing. If you’re a retiree and you need income to live on from your portfolio, maybe getting the dividends in cash makes sense for you. If you are still working and saving and actively investing in the stock market, then I think you really should consider reinvesting those dividends.
With both of these tips here, it seems like the one, two, 3% differences per year, it might seem like a small amount, but over 5, 10, 20, 30 years, those couple percentage points a year can make a huge difference. So those are my two tips for long-term investors. If you’ve got questions or need clarifications on any of these points, feel free to get in touch with us. That’s going to do it for this week’s video. Thanks as always for tuning in.
