“Boy, I wish I’d bought that Apple stock back in the eighties. I’d be rich now!” Probably not! Not unless you had an iron stomach or the ability to see far into the future. In the almost 40 years that Apple has been a stock available to the public, it has spent long periods of time falling in value. There was a short period at the beginning of this century when Apple lost 75 percent of its value. With no further information, do you think you’d have held on to it back then? Not likely. You see, humans are creatures of emotion. We make many of our decisions from our hearts, out of fear… or greed.
We financial advisors don’t help much. We talk in averages. If the investment we recommend rose in value from $100 to $500 over the last 20 years, we tell the investor that it averaged making 8.38 percent per year. So what does he expect from that investment over the next year? He expects to make 8 percent. He’ll accept more, but he expects at least 8. After all, that’s what his advisor told him! What we failed to tell the investor is that this investment NEVER made 8 percent in any one year. It produced a range of returns from a minus twenty percent to a plus thirty percent, which averaged out to the eight percent we told him. But we set his expectations for a steady eight percent growth, which is not good for either the investor or the advisor.
I recently met with a couple who’d done business with me since 1986. During that first appointment they invested $100 in a mutual fund I represented at the time. They never added any money to it except to reinvest the dividends and capital gains it produced, on which they paid taxes in the years they were declared. They have invested lots in other accounts, but they’ve never touched that mutual fund. When they came in the other day for a review, that account was worth over $3,000. That is the equivalent of investing $100,000 and having it grow to over $3,000,000, for an AVERAGE of over 10 percent per year. But during the final quarter of last year, it lost 16 percent. So while it didn’t bother these folks to lose $450 in value from that investment, what do you think they would have done had they invested the higher amount thirty three years ago and then lost $450,000 in just three months!? What would you have done?
Investing in the ownership (stocks) of great American companies can lead to riches, but it doesn’t usually happen very fast. It takes patience, and if you don’t personally know much about it, it takes a good financial advisor.