- Recent research shows that the average investor underperformed the S&P 500 in 2018. And consistently for the last 30 years.
- Today, Alexander Green explains how investors can help themselves and end terrible returns.
Dalbar Inc. – a Massachusetts-based research firm that is the financial community’s leading independent expert for evaluating investor performance – recently released its 2018 report.
The news was not pretty. The average equity fund investor lost 9.42% last year. Yes, the S&P 500 had a down year too. But it retreated only 4.38%.
Was this just a bad year for investors?
No. It was a typical one of missed opportunities, poor decision making and substandard returns.
I’m not overstating the situation.
According to Dalbar, over the past five years, the average equity investor has underperformed the market by 4.35% annually. Over the past 10 years, by 3.46% annually. And over the last 30 years, by 5.88% annually.
How is performance this bad even possible?
History shows that investors are too complacent to sell during good markets and too despondent to buy during bad ones.
They jump in and out of the market, hoping to be in for the rallies and out for the corrections. Instead, they are in for the corrections and out for the rallies. (At least, they are enough to massively underperform the S&P 500.)
At this point, you might be thinking, “Thank God most of them have money in fixed income investments as well.”
Sadly, that hasn’t helped.
The benchmark Bloomberg Barclays US Aggregate Bond Index returned an average of 6.1% annually for the 30 years through December 2018.
Yet Dalbar reveals that, over the same period, the average bond mutual fund investor earned 0.26% annualized. That’s not a misprint. It’s nearly 600 basis points less… per year.
Since inflation averaged 2.49% over the period, the average bond investor’s money shrank by more than 2% a year in real terms.
As Richard Bernstein – former chief investment strategist at Merrill Lynch – put it, “What’s shocking is that simply by investing, most people actually made themselves poorer. They’re just shooting themselves in the foot, over and over.”
I feel for these folks. I really do.
There is an appalling lack of financial literacy in this country. But individual investors are not to blame.
Basic financial literacy isn’t taught in most schools. Most parents probably aren’t terribly knowledgeable in this area themselves and so can’t pass along good information either.
Financial markets are complex, and there is a lot of off-putting jargon for newbies. Most people have no understanding of things like 12b-1 fees or price-to-earnings ratios or asset allocation.
And so they trundle down to a local brokerage firm and open an account with someone who has been trained to convert a substantial percentage of client assets into the firm’s assets.
After a few years, these customers realize they are just treading water. Their accounts are growing slowly or not at all.
So, in frustration, they pull their money and try to manage things themselves through a discount broker. But while their fees are now lower, they still don’t have the expertise to handle their investments effectively.
And they become just another casualty among the Dalbar statistics I just quoted.
If this sounds like you or someone you know, let me make a straightforward and admittedly not unbiased suggestion: Quit beating your head against the wall and subscribe to my investment letter, The Oxford Communiqué.
Subscriptions start at $49. And it’s worth it.
The independent Hulbert Financial Digest ranked my Communiqué on its honor roll of the nation’s top-performing investment letters for 16 years, right up until Mark Hulbert folded the service a few years ago.
As a subscriber to the Communiqué, you will have full access to a proven investment system with well-defined buy and sell criteria – and four distinct portfolios, each with high-returning recommendations.
I won’t make any exaggerated claims about future results. If you are like most investors, your returns have nowhere to go but up.
The key is to recognize this, stop struggling, and accept help from someone who is both qualified to give it and has no interest in “capturing your assets” or charging you commissions, sales loads or wrap fees.
The investment advice I give is untainted by conflicts of interest or ulterior motives. And you can implement it yourself through the (discount) broker of your choice.
It’s disheartening to realize that millions of Americans have worked hard, paid their taxes, lived within their means and saved regularly to meet important financial goals… only to fritter it away in the financial markets.