By Allen Giese, CLU®, ChFC®, ChSNC®

After 34 years as an investment advisor and wealth manager, if there’s one thing I’ve learned to be true, it’s that the most critical attribute toward favorable long-term investing results is the investor’s temperament.

Before proceeding, consider these two somewhat contradictory statistics:

1. The S&P 500 Index started the year 1950 at 17 points. That’s not a typo. Today, as I write this, it’s a bit over 5,200. With dividends reinvested, that means $1,000 invested in 1950 would be a little over $2.9 million today (if it was possible to invest in the S&P 500 in 1950, which it wasn’t). If you’re curious, that’s a little over 11% compounded return.

2. Over that same stretch of time, the S&P 500 experienced a decline of approximately one-third, on average, every five years. The most recent was 2022, when we experienced a 25% decline.

These are two very different stats: phenomenal growth over time vs. scary capitulation along the way. Which of these two things you focus on and respond to the most will determine your long-term investment results. What you focus on—the long-term advance or the short-term declines—drives your investment strategy.

When looking at those two stats side by side, as I’ve presented them, a rational person would come to the conclusion that the benefits of the long-term growth far outweigh the uncomfortableness of the volatility. (To satisfy the industry compliance folks, I’ll remind you that past performance is no guarantee of future results). But who said anything about people being rational? We’re human, and that’s where temperament steps in.

It’s those declines that I want to focus on here and where temperament makes a difference. Because it’s those declines that cause some people to flee even the highest-quality equity positions. Why? I’m sure a big part of that explanation is that it’s basic human instinct to flee danger. But what makes it so puzzling is that when applied to pricing and buying versus selling, this fleeing is exactly opposite to what we do in every other aspect of our lives.

Throughout our lives, we seek out goods and services we want and need. And when we see the prices drop on those goods and services, what do we do? We stock up—sometimes in a frenzy. We easily recognize that those lower prices equate to more value, so the only logical decision we can make is to buy, maybe even more than we need. If the opposite occurs and the prices of those goods and services increase, then we buy less, sometimes adjusting our lives to consume less, until at some point we simply bypass the item altogether and find something else to fill our needs or just do without.

Consider what the S&P 500 is at its core: some of the largest companies in the United States making products that many of us use every day. In addition to that, we invest in these companies through our own investment programs and retirement plans to help us achieve long retirements that produce income that we intend to meet or beat inflation with over decades. Historically speaking, that is what has happened.

Then, one of those market declines I mentioned comes along. The cause certainly appears like a crisis at the time, and fear becomes the dominant force guiding most investors. Market pricing drops, and instead of doubling down on the sale pricing of these great companies—which are still producing the goods and services we use every day in our lives (which isn’t going to stop)—the investors flee the investment market.

At some point, the crisis passes, and share prices start to rise. Once investors feel comfortable that this is happening, based on recent upward movement in prices, they trickle back in, and as the “news” looks better and better, the buying turns into a feverish pitch.

There’s a research company out of Boston named Dalbar that studies the returns we, as investors, actually get versus what the market would have delivered if we had just bought the S&P 500 and gone to the beach. Year after year, Dalbar finds that the real return investors achieve is some fractional value of what the S&P 500 delivered. I’ve been following these Dalbar reports for years, and the results don’t fluctuate much. Typically and very roughly, investors tend to get approximately 60% to 70% of what the market is willing to give.

Temperament. That, I firmly believe, after all these years, is the reason we trail in real returns versus what the market produces. We think we know better or are smarter than the market. We don’t, and to me, that is quite clear. And to me, therein lies the real value of having an advisor. To help us get out of our own way. To help us take some of that emotional component out of the equation. To remind us to give more weight to that first stat (phenomenal growth) than that second stat (scary capitulation). And, quite frankly, to help us manage our temperament and our own behaviors.