Peter Lynch, one of the world’s best most successful investment managers, was put in charge of a tiny fund named Fidelity Magellan in 1977. When Lynch took over Magellan, had only $18 million of assets under management. From 1977 to 1990, Lynch earned an annualized return of 29%. Fidelity Magellan’s assets grew to $14 billion. Lynch’s record with Magellan is truly one of the greatest investment runs in history. Yet despite Lynch’s incredible 29% annualized returns, the majority of people who invested in the Fidelity Magellan Fund lost money.
How comes? Because we are not wired for successful investing.
Fidelity Investments conducted a study of the Magellan Fund and what it found was disturbing. While Lynch posted 29% per year returns, the average investor in his fund didn’t break even. Instead, they fell victim to their emotions.
After Lynch had a hot stretch of investing, people would pile cash into the fund. Then, when Lynch’s returns levelled off for a while, those same investors pulled their cash and left. Greed drove money into the fund at high points, and fear pulled money out of the fund at low points. Natural human emotions drove the average investor in the Fidelity Magellan Fund to do exactly the wrong thing at the wrong time. Instead of getting rich by investing with one of the greatest fund managers of all time, the average investor didn’t even turn a profit.
The most valuable advice: You can’t time the stock market. In fact, study after study proves that you shouldn’t even try. Some of the world’s best investors have tried and failed to identify the top of the markets and have lost millions of dollars in the process.
An investor should never spend time worrying about a bear market. Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves. Great long-term investment results are achieved by the amount of time you spend in the market. The longer you invest, the better! It is virtually impossible to successfully time the market. Trying to do so is an almost certain way to miss out on a significant percentage of your returns.
There is more than a century of data available showing that over time, the stock market heads in one direction. And this is up. We will see bear markets. But those will end faster than you expect, and the market will recover and keep going higher.
Sven Franssen