CFP® and Senior Financial Planner at Pure Financial, Matt Horsley, sits down with Joe Anderson to talk investing. Find out the difference between the two main approaches to investing and the pros and cons of each. Should you take a gamble with a more conventional approach or maintain a disciplined, institutional approach? Joe and Matt discuss the performance of the S&P 500 and what investors should take away from it. Finally, learn what the “behavior gap” is and the drawbacks involved.
12:10 “There are hundreds, if not thousands ways to invest your money, but really it comes down to two different approaches”
12:15 “The first approach is what we call more of a conventional approach to investing; and it’s what most of us are used to over time”
12:31 “This is an approach that in some ways, you believe you some mobility as an investor to time the market or to figure out which stocks to buy…there’s some crystal ball approach”
13:00 “Compare that to a more evidence-based approach to investing, or what we call an institutional approach. And what that basically says is that we believe that capital markets work, and that at any given time, prices of security or stocks are fair”
13:48 “When you compare the two approaches, the institutional approach is a much more disciplined way to invest. Basically what that says is that what I want to do is have a fully diversified portfolio, controlling all of the things that I can control”
14:54 “What all the evidence says is that there’s this huge gap, called the behavior gap, between what people should do and what people actually do as investors”
17:04 “If you look at the performance of the S&P 500, over the course of the past 20 years, it has averaged around 8, 8 ½ %, while the individual investor has averaged more around 4%. If you take that over a longer period of time, like over 30 years, the S&P averages more towards 11[%] while the individual investor averages around 7[%]”. It’s a 7% spread, and that’s really the behavior gap we’re talking about that can cause a complete collapse of your financial plan”