By Nathan Goodwin
The 2015 Quantitative Analysis of Investor Behavior from DALBAR Inc. came out recently and concluded what it always does – the average investor lags both market and fund performance, and has in every 12-month period over the last 30 years. Why is that? I would suggest a couple of reasons.
First, the average investor thinks they can beat the market through timing. Not only are they proven wrong time and time again, they are usually wrong to a painfully large degree. The DALBAR study found that the average investor had annualized returns of 3.8% in equity funds while the S&P averaged over 11%. Additionally, the study found that the worst performance for the average investor came at critical points, when the market was facing a severe decline or bouncing back with strong gains.
“What you are dealing with is a reaction to the markets as opposed to a planned investment strategy. The problem isn’t just the lagging returns and bad timing, it’s the compounding effect from missing out on the good numbers. When you look at returns over time, the periods where investors underperform the funds they own or the indexes they are benchmarking winds up having a material effect on their portfolio for years or for a lifetime.” -Lou Harvey, DALBAR President
By trying to miss the down markets, the average investor loses out on the ups. What good is it to save 5% on the downside if you don’t get back in until the market jumps 15%? Additionally, trends rarely pan out. For example, the top performing stock from the S&P 500 in 2014 gained 124%. That same stock lost 21.8% in the first half of 2015, ranking 476 out of 500 stocks. (BTN Research) Conversely, the top performing stock for the first half of 2015 in the S&P 500 gained 92.3%. That same stock lost 7.2% in 2014, ranking 430 out of 500. (BTN Research)
Secondly, the average investor lags the market because they don’t have a plan. The saying “it’s hard to know how to get there if you don’t know where you’re going” fits pretty well here. One of the most important things you can do for your future is to develop a financial plan. There are countless benefits, but having a plan can help to change your approach from short term to long term. This can have a tremendous impact on your portfolio over time.
With a little guidance you can do far better than the average investor. So where do you want to go? We can help you get there.