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You Are the Problem

By Morgan Housel - Aug 29, 2014 at 1:13PM

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You are your own worst enemy.

The S&P 500 rose 30.49% last year, after inflation. Amazingly, that was the fifth-best annual return since World War II.

Here's what's more amazing: Gallup asked 1,000 U.S. investors how much the market went up last year. Basically, nobody had a clue:

More investors think the market declined in 2013 than knew it had one of its best years in history. The 7% of investors who know how well stocks did last year is about half as much as the 13% of Americans who don't know what the July 4 holiday commemorates, and far below the 18% of Americans who think the sun revolves around Earth, according to a separate Gallup poll.

So, statistically, you're an idiot.

And these results aren't a fluke. Investors have been in denial for five years. Stocks went up 26% in 2009, but two-thirds of investors thought they fell. Stocks rose 15% in 2010, but half of investors said they went down. Stocks rose in 2011, yet more than half of investors said they declined, according to surveys from Franklin Templeton.

Last year, Gallup showed that the average American thinks very little of the stock market. Only one-third agreed that it was an "excellent/good" way to grow assets. Millenials use words like "casino," "rigged," and "crapshoot" to describe stocks. 

But if you calculate every five-year period since 1871, the last half-decade ranks as the fourth-best time to have been in an investor. Adjusted for inflation, the S&P 500 gained more in the last five years than it did from 1995 to 2000, during the roaring bull market of the 1990s. The difference is, back then, investors were obsessed with the market's gains. Today, they're oblivious.

Even 10-year returns, which include the 2008 market crash, are pretty good. Adjusted for inflation, the S&P 500 is up 73.8% in the last decade. The median 10-year gain since 1900 is 87%, so we're pretty close to average. The median gain since 1970, when the index was closer to its present form, is 74%, so we're exactly average.

Volatility hasn't even been that strange. Since 1928, there have been 21 occurrences of stocks falling 20% or more, or once every four years. In the last decade, it has occurred twice, so that's pretty normal. Stocks have lost 30% of their value nine times since 1928, or about once a decade. That also happened once over the last decade.

Here's the truth: The last five years will probably be the best five-year period you'll ever experience as an investor. The last decade has been average. If you've struggled through this period, or keep telling yourself that buy and hold doesn't work, or that the market is a scam, it's your own fault. Stocks have done over the last decade what stocks have done for countless decades: offered a pretty decent return with lots of volatility mixed in the middle.

The fact that the average investor has been oblivious to this progress shows that the average investor is participating in a game he or she does not understand and doesn't agree with. That's unfortunate. But it means there's a simple answer to all the stories you hear about investors not trusting the market: the market isn't the problem. You, and your expectations, are the problem. You are your own worst enemy.

Check back every Tuesday and Friday for Morgan Housel's columns. 

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