“During his tenure [famed Fidelity Magellan Fund manager Peter] Lynch trounced the market overall and beat it in most years, racking up a 29 percent annualized return. But Lynch himself pointed out a fly in the ointment. He calculated that the average investor in his fund made only around 7 percent during the same period. When he would have a setback, for example, the money would flow out of the fund through redemptions. Then when he got back on track it would flow back in, having missed the recovery.” – Spencer Jakab, Heads I Win, Tails I Win
Two weeks ago, I spoke to a distinguished audience of Oxford Club Members at our 21st Annual Investment U Conference.
As the Club’s ETF Strategist, I focused my presentations on how a portfolio of “smart beta” strategies could beat the market.
But at the last minute, I decided to go rogue.
Yes, I would eventually discuss my favorite ETF strategies.
But before I did, I tackled a sensitive and politically incorrect subject.
I called it “the elephant in the room.”
Why You’re a Lousier Investor Than You Think You Are
At The Oxford Club, we are dedicated to discovering and developing investment ideas that will make you money.
Our recommendations can range from the latest red-hot biotech play… to a simple ETF strategy that has beaten the market for more than 50 years.
Here’s the rub…
If you ever dare to place your own investment returns under a microscope…
You’ll likely find you aren’t doing as well as you expected.
Of course, the most natural thing is to blame us and our lousy investment advice.
But chances are, you’re falling short not because of our investment recommendations…
You’re falling short because you are – like investors in Lynch’s Magellan Fund – trying to time the market.
Let me explain…
We can give you the best investment advice in the world.
But it’s not going to matter unless you take that advice – and implement it consistently.
Here’s the remarkable slide I showed the conference audience.
It includes some of the most remarkable statistics I have ever come across.
Research firm Dalbar found that, over 30 years, the average investor underperformed the S&P 500 by 6.18% per year!
The consequences of lagging the market by so much, for so long, are astonishing.
To put these numbers in perspective…
Say you start with $1,000 in year one, adding $100 to your account each month. And you invest everything in a low-cost S&P 500 index fund, earning 10.16% per year.
After 30 years, you end up with $254,716.
Do the same thing, but earn only 3.98% over the same period, and you end up with $72,452.
That’s a remarkable 3.5X difference!
It’s hard to blame this massive difference on lousy investment advice. After all, it’s unlikely that all investors are subscribers to “terrible” financial newsletters.
The far more likely explanation is investor psychology.
Investors lost a fortune speculating in the dot-com bust.
They sold out of stocks in 2008 – and have only tiptoed back into the market since. They listened to the doom-and-gloomers and shifted their assets into gold.
The specifics don’t matter. The end result is the same…
As with Lynch’s Magellan Fund, investors tried to time the market – but failed.
My Advice Beats the Market… But Does It Matter?
In my Oxford Wealth Accelerator trading service, I run a strategic portfolio that consists of smart beta strategies.
Each of these strategies – including momentum, value and Dividend Aristocrat investing – has a track record of beating the S&P 500 by up to 2% per year.
That may not sound like a lot, but it adds up to a big difference over time.
Let’s repeat the example above…
Start with $1,000 in year one and add $100 to your account each month.
Invest in a smart beta portfolio that earns 11.66% – that is, it beats the S&P 500 by just 1.5% over 30 years – and you end up with $356,639.
Thanks to the miracle of compound interest… That’s an extra $101,923 over the $254,716 you would have earned investing in a typical index fund and a whopping $284,187 more than the $72,452 an average investor earned.
The question is, does any of this matter?
I may be offering you “a better mousetrap.” But if you don’t use that mousetrap… it won’t make a darn bit of difference.
Here’s What You Should Do
If you want the excitement of playing the game, set aside a small portion of your funds to buy options or place speculative bets.
Perhaps you’ll invest in the next Netflix (Nasdaq: NFLX) or Amazon (Nasdaq: AMZN) and hold on to it long enough for it to make a difference.
But if you want to make money consistently, don’t be like the average investor and try to time the market.
You’ll thank me in 10 years.