The road to financial success is paved with lots of twists and turns. Making matters worse, most investors don't seem able to get out of their own way, especially during times of heightened market volatility. 

How so? The long-running research SPIVA series by S&P Global shows that active fund managers have consistently wound up significantly underperforming their respective indexes. And that's over shorter as well as longer timeframes. Independent studies by Morningstar and Dalbar have come up with similar results. 

To make matters worse, according to Dalbar President Louis Harvey, such perpetual underperformance by active managers is too often multiplied by a natural tendency by many investors to overreact to bouts of market volatility. After years of studying such investment behavior, he explains that "investors' risk tolerance is highly susceptible to fluctuations in fund values." A typical fund investor, Harvey adds, "shows an innate proclivity to sell at just the wrong time whenever there's market upheaval."

Based on our own research as well as work done by leading academics studying the dynamics of behavioral finance and market volatility over extended periods, below are three evidence-based tips. These are offered as a few common strategies used by our wealth advisors to help create a better investment experience for fund owners of all stripes, whether they're novices or veterans. 

Tip #1: Take Advantage of Market Pricing, Don't Fight It. 

Instead of trying to outguess others who might be making billions of dollars worth of equity moves on any given day, focus on what free-markets do best. Namely, such a system creates a real-time means for buyers and sellers to exchange securities at prices which each side of the transaction can accept as valid and fair. 

Understanding market pricing is an important enhancement to the investment experience in terms of helping you to step back and focus on the bigger picture. Keeping in mind how markets are structured to work in the aggregate will free your investment decisions to be guided by the knowledge of how price elasticity can be your friend over time, not your enemy. 

This is a theme we've been writing about for years. It's such a core element of our investment process that IFA's Founder and CEO, Mark Hebner, has created a model to explain just how fair pricing is achieved on a regular basis. It's depicted using an interactive chart that illustrates just how such a process works. (See "The Random Walk of Market Returns" chart below.)

Tip #2: Don't become a 'Time Picker'

At IFA, we refer to investors who think they can move in and out of markets with any sense of consistency as "time pickers." (See Step 4 in Hebner's book "Index Funds: The 12-Step Recovery Program for Active Investors.") Still, avoiding big market downturns can be alluring. "The predicament is that the market's worst days tend to be equally concentrated and just as difficult to identify in advance as the best days," notes Hebner. 

The chart below shows how an investor who hypothetically remained invested in the IFA SP 500 Index throughout a 20-year period would've earned a sizable (9.68%) annualized return, growing a $10,000 initial investment to more than $63,474 (through 2023). 

When the five best-performing days in that period were missed, the annualized gain shrank to 7.19%, or $10,000 growing to slightly more than $40,064. Likewise, if an investor missed the 20 days with the the largest gains, the returns were reduced to just 2.84%. And if the 40 best-performing days were missed, and investment in the IFA SP 500 Index turned negative, with $10,000 eroding in value to just $7,909.14 — a loss of more than $2,090. 

On the flip side, avoiding the 40 worst days in the IFA SP 500 Index during this timeframe would've increased an investor's return by 1,050.29% more than someone who stayed in the market every day throughout the entire 20 years. (See table below.) "This shows how market timing can be tempting," Hebner observes. "The problem, however, is finding the crystal ball that can forecast the 40 worst performing days out of 5,034 days."

In his "Index Funds" book, Hebner references research by H. Nejat Seyhun. The University of Michigan professor analyzed 7,802 trading days for the 31 years from 1963 to 1993. The study concluded that 90 days generated 95% of all the years' market gains — an average of just three days per year. 

"The expected return of markets are positive and essentially constant," Hebner summarizes. "Therefore, investors who are out of the market for any period of time can expect to lose money relative to a simple low-cost and tax-efficient buy-and-hold strategy." 

Tip #3: Let Markets Work in Your Favor

Patience is a virtue. In fund investing, this has proved especially true. Historically, equity markets have provided broad opportunities for growth of wealth over time. Consider the interactive chart below. 

On the top, you can compare annual returns for different IFA Index Portfolios with varying levels of stocks and bonds. (Index Portfolio 80, for example, has 80% allocated to stock funds. Meanwhile, Index Portfolio 20 has 20% in stocks.) Also, clicking on other icons brings up overlays of graphs for different indexes and asset classes. 

In particular, look at the bottom half comparing growth of $1 over 50 years. You can choose IFA Index Portfolio 100, which is a globally diversified all-stock portfolio. Then, hover over the "SV" icon to see gains by the IFA Small Cap Value Index. Or, pick "EV" for the IFA Emerging Markets Value Index. A number of other combinations are available to evaluate using this tool. 

At the lower end of the risk-return spectrum is the "1F" icon. This represents the IFA One-Year Fixed Income Index, a conservative benchmark covering short-term and high-quality (investment-grade) bonds. 

Notice that either way $1 dollar was invested, putting money into the types of assets courting historically higher levels of risk have done better. This makes sense, given that applying an efficient frontier analysis — where raw returns are judged relative to how much market risk is being injected into a portfolio — has been identified by leading academics as key to long-term investment success. 

As a result, staying away from urges to react to short-term market conditions goes hand-in-hand with selecting a proper asset allocation plan for a diversified portfolio. 

Based on a wealth of independent academic research as well as our own scientific evaluation of market behavior, we've developed a series of questions to help investors strike the right balance between different asset classes. The IFA Risk Capacity Survey can be taken online at your leisure.

It's often used by not only new clients, but also those who've been working with one of our advisors for many years. After all, life changes and individual financial situations evolve over time. Taking another run at this survey can only enhance any ongoing assessment of your progress in developing a rewarding investment experience. 

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This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you.  For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/