In Roald Dahl’s great book, Charlie and the Chocolate Factory, people around the world are in a feeding frenzy eating their way through Wonka Bars in hopes of finding a Golden Ticket. A holder of a Golden Ticket will get access to Wonka’s Factory to experience the inner workings of his mysterious operation and receive a lifetime supply of chocolate.
Emotions quickly take over and people act irrationally as they hunt for one of the five tickets. Some individuals go as far as ordering boxes by the truckload. People offer outrageous sums of money for the last ticket once it’s discovered.
Investors often act irrationally during periods of greed and fear. When greed takes over, investors abandon their investment plan and aggressively pursue high flying stocks like they did during the dot com phase in 1999 or the recent bitcoin craze.
Speaking of greed, Augustus Gloop, Veruca Salt, Violet Beauregarde, and Mike Teevee were tempted by the luscious candy treats. These four were impatient and couldn’t control their impulses. As a result, they were whisked away by pipes or teleported to some other location as Oompa Loompas sang in the background.
Fear is present in the movie during the boat ride through the tunnel of terror. Wonka appears to be driving the boat at excessive speeds scaring his passengers in the process. All the while, Wonka is in control. It’s not possible to control the stock market, of course, but you can increase your odds of success by working with a Certified Financial Planner and completing a financial plan.
Gripped by fear, investors sell their stocks at the worst possible time. During the month of May U.S. equity funds had outflows of $16.3 billion[1] despite positive returns from most of the major indices. Investors reacted to headline news on Italy, North Korea, and interest rates by yanking billions of dollars from the stock market.
Investors fear market corrections and loss of principal. As a result, they’ll sell investments too early or try to time the market before a correction arrives. These short-term actions can create long-term problems to your wealth. According to the Motely Fool, the odds of losing money in the S&P 500 for one day is about 53%, over 20 years it’s 0%.
Investors often get impatient when their portfolio is not delivering immediate results. A diversified portfolio of mutual funds will have varying degrees of short-term success. So far in 2018, aggressive investments like growth or technology are performing well, while bonds are not. Investors focusing on the laggards will want to sell these holdings to chase the returns of their better performing funds. This might appear rational but it’s not. If you constantly chase the best performing sector by selling your laggards, you’ll most likely end up with a losing proposition a year or two later. For example, investors who sold underperforming emerging market funds in 2013, 2014, and 2015 missed out on stellar returns in 2016 and 2017.
After two attempts Charlie finds the fifth Golden Ticket in a Wonka Bar. He was able to purchase it after finding a coin in the sewer. He and Grandpa Joe are invited to join the tour. They mostly follow the rules and end up winning the contest when Charlie returns his everlasting Gobstopper. Charlie not only receives a lifetime supply of chocolate, but he’ll become the heir apparent to Willie Wonka. His patience was rewarded.
The patient investor is also rewarded over time. If an investor can ignore the daily gyrations in the stock market, she’ll be rewarded by its powerful compounding. If she invested $10,000 in the Vanguard S&P 500 fund on May 31, 1976 and held it through this past May, she would’ve enjoyed an average annual return of 11.5%. Her original $10,000 investment is now worth $786,302.[2] During the forty-year run, the market experienced several wild rotations including Black Monday, October 19, 1987, when it crashed 22%. She also endured the Tech Wreck from 2000 to 2002 when it dropped 43%. Last, it fell 37% during the Great Recession. However, since she held on through these minor disruptions she experienced outsized gains and a large account balance.
The markets will rise and fall for the foreseeable future so it’s imperative for successful investors to check their emotions at the door, follow their financial plan, and hold on for the long haul. If you can do this, you’ll be rewarded with your personal Golden Ticket!
“It’s the fifth Golden Ticket, Mother, and I’ve found it!” ~ Charlie Bucket
June 3, 2018
Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.
Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.
[1] https://www.ici.org/research/stats/flows/ltflows/flows_05_30_18
[2] Morningstar Office Hypothetical Tool. May 31,1976 to May 31,2018. The return is before taxes and fees are deducted.