The Investor Mindset | By Connor J. Kin
By Connor J. Kin - Financial Planner
The S&P 500 is arguably the most well-known stock index in the U.S. economy. Tracking the 500 largest companies between the New York Stock Exchange and the Nasdaq, the S&P 500 is often a unit of measure used to determine the overall strength of U.S. markets. First introduced in 1957, the comprehensive index tracks leading industries such as healthcare, information technology, utilities, and many more. Stocks are added and removed over time, dependent on a multitude of factors, however, it is widely accepted that the index gauges the overall health of the U.S. economy.
In the 2024 calendar year, the index has hit multiple new record highs. Historically, the index has lived through some of history’s largest events. Most recently in the last 25 years, this includes the dot com bubble, the 2008 financial crisis, and the COVID-19 global pandemic. Through these difficult times, the index and the U.S. economy have experienced loss and tribulation. However, one theme has remained consistent since 1957. The S&P 500 has a knack for recovering and recuperating its losses, no matter how severe. If the broad stock market index tracking the overall health of the U.S. economy has repeated this characteristic time and time again, why is the investor still so hesitant?
In my experience as a Financial Planner, the answer to this question boils down to a few key points:
1. Risk and volatility are two different subjects
Risk is the chance that an outcome or investment’s return will differ from its expected outcome or return. Volatility is the measure of the dispersion of returns for an investment. Many investors commonly think of risk and volatility as being the same. This misconception often drives the investor to look further down upon any upside potential their investments bring, and rather focus on the intermittent highs and lows, which at the end of the day means little when investing for your long-term retirement goals.
2. Time horizon is unique and personal for all investors, but the principle remains the same
Time horizon is defined as how long an investor is expected to hold an investment until they need the money back. This subject also dovetails into the conversation between risk and volatility. If an investor is 30 years old, they have a significantly longer time horizon than an investor who is 75 years old and retired. Therefore, the younger investor in their working years should have their portfolio scaled towards taking more risk and experiencing a greater amount of volatility compared to the retired investor.
3. Fear of loss often prevails and takes center stage in the mindset of an investor
Removing emotions from investing may seem unrealistic to the common investor, however, it can be the key they need to find peace along their savings journey. The media plays a large role in how the investor shapes their thoughts, and consequently their actions regarding their own investments. The fear of loss prevails in the mindset of many investors and comes into play as they navigate and decide how they should be investing for their future.
The mindset of the investor differs from individual to individual. No two approaches to investing are the same. An investor can only control the controllables with their strategy. Removing emotional ties and sticking to a disciplined, proven approach over time puts an investor in the best position to achieve their goals in the long run.
History is the best teacher when it comes to investing. Many investors overlook this as they seek quick ways to make a buck, or are fear sold that the stock market is too risky of an investment. Overcoming these fears and developing a financial plan that addresses today’s goals and tomorrow’s needs is the first step to making a difference in you and your family’s lives.
- Risk: What It Means in Investing, How to Measure and Manage It (investopedia.com)
- Volatility: Meaning in Finance and How It Works With Stocks (investopedia.com)
- Dotcom Bubble Definition (investopedia.com)
- What Is the History of the S&P 500 Stock Index? (investopedia.com)
- History of the S&P 500 | SoFi
- Investment Time Horizon: Definition and Role in Investing (investopedia.com)