facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Human Error = Investment Failure ?  Thumbnail

Human Error = Investment Failure ?

Why is investment failure most often caused by human error?  When an airplane crashes or a train wrecks or a car crashes, occasionally, the cause is sometimes some sort of mechanical failure but more often than not the root cause of the disaster is “operator error.”  I am proposing that investment failure in terms of the stock market is often human error.

Periodically, I will meet someone who tells me about a time they invested in the stock market and lost a lot of money and that stocks are too risky.  As the conversation continues, I learn about the circumstances, the when, the how, the why, the pain, and often the amounts.  These are always sad conversations.  It is sad because this same story is told over and over again by different people at every point in recorded history.  Also sad, because the outcome in many situations could have been very different and perhaps totally avoided.

Stocks as an asset class have compounded at 10% per year for sixty years and paying dividends that have been growing at twice the inflation rate.  One-year average returns for the S&P 500 have been 10.8%; five-year rolling average returns 9.4%; ten-year rolling average returns 9.24%; fifteen-year rolling average returns 9.2% for the S&P 500. (1)  Ten thousand dollars invested in the S&P 500 at the beginning of 1970 has grown to $1,663,000 assuming the reinvestment of dividends and capital gains. (2)  This all happened despite the entry point in 1970 was in the midst of a 36% eighteen-month decline that was followed by 11 bear markets (a decline of 20% or more from the previous high point), including the three biggest since the Great Depression of 48%, 49%, and 57%.  Remember, the S&P 500 is an index of five hundred U.S. companies.   You cannot invest directly in the index.   Past performance is not a guarantee or indication of future results.

So how is it that some people continue to lose money in the stock market?  The answer is really quite simple.  We are all human.  It is hard-wired into our DNA to run from danger.   Be fearful and cautious of strange sounds coming from the dark.  Flee the saber-toothed tiger.  Depart a burning building.  The natural, human reaction to a stimulus that causes discomfort or pain is to make a hasty retreat from that stimulus.  

When an investor listens to frightening news about economic slowdowns, rising interest rates, growing unemployment, trade or shooting wars and then their investment statement is lower than a previous high-water mark, the “human” in many people begins seeking relief from the pain.  

Unfortunately, the “natural reaction” is often detrimental to financial health.  Getting out of the market to eliminate the pain only creates a new and even bigger problem: When to get back into the market?  Historically, in my opinion the best time to be invested in the stock market is when it is going down, when it is going up and when it is staying flat.  Said another way, there is never a bad time to be invested.  “Why, you may want to ask?

When you get out, then you need to decide when to get in, then decide again when to get out, then decide when to get back in.  How often are you going to get out and then back in during your lifetime?  How often are you going to be too early to make a move?   Or too late?  How often are you going to be right?  Or the really important question, how often are you going to be wrong?   So many decisions.  So many chances to be wrong?

I would propose you make one decision and one decision only.  Get into the stock market and stay in.

The S&P 500 may have averaged 10% per year since 1926 but the market is rarely average.  Only 8% of the time has the annual return been between 8% and 12%.  The remaining years were either above or below.  The stock market doesn’t always make money.  It is not up every year --- but it has made a positive return in 70% of every year since 1926. (3)  Did you get that?  Seventy percent of all years result in a positive return.  While I cannot guarantee the future, the past has been pretty good.

If you are inclined to “think,” “believe,” or “hope” you are smart enough to know when the stock market is going up / down / sideways, I can only wish you good luck.  Outsmarting the markets is really more a matter of luck than smarts.  In the last forty years, I have talked to people who got out when the markets were up and “couldn’t go higher before they fell back” …or…got out “because the wrong person or party was in the White House”…or… bought a stock because it was all in the news like Tesla or Game Stop…or… etc. etc. etc.  This is not investing.  This is not how to build wealth.  This is gambling.  It is like Vegas.  And your odds of success are about as good as they are in Las Vegas. 

I am not saying you never make changes to your investments.  Yes, adjustments are periodically necessary.  Someday you may want or need to spend some of this money or give to a charity.  First articulate your priorities and your goals.  What are you trying to accomplish?  When are the priorities and goals going to take place?   Why are these your priorities?  After you identify the “what,” “when” and the “why” then create the plan to make it all happen.

The financial plan is the “how” to make the priorities and goals happen at the time you want them to happen.  After the plan is completed, then it is time to decide what investments are appropriate make the priorities and goals a reality.  

If the priorities and goals don’t change, then the investments should probably not change.   If the plan calls for sixty percent in stocks with a third of that each in large-, mid-, and small-cap stocks with sixty-five percent of the sixty percent in stocks of foreign companies, then keep that ratio and DO NOT change the ratio unless your goals change.


These comments are intended as guidance.  If you have been guilty of being “human” in the past and made decisions that have not been productive for your financial well-being, you have lots of company.  On paper, all this sounds simple.  In reality, it can be quite difficult.  We can provide guidance and a cool head in times of financial stress.

Wollman Wealth Designs is a financial planning firm in Escondido, CA.  We offer individuals, families and trusts financial planning and investment advisory services through our broker dealer, Voya Financial Advisors.   Your finances are personal.   Planning for them should be too.   Call or send us an email.

  1. https://dqydj.com/sp-500-historical-return-calculator/
  2. https://dqydj.com/sp-500-return-calculator/
  3. https://www.nerdwallet.com/article/investing/average-stock-market-return

The views and opinions expressed are those of the author, and the information should not be construed as individual investment advice, or as the opinion(s) of Voya Financial Advisors.