Why You Suck At Investing

InvestorPsych

Bloomberg asks the question: are you as stupid as your financial advisor thinks?

Investors need to be saved from themselves. That”™s the conventional wisdom, and there”™s some truth to it. Individual investors can have comically bad timing. They buy when stock prices are high. They panic and sell when markets plunge. They invest with the hot mutual fund managers just as the managers’ luck runs out. And what’s their reward? They supposedly underperform the very mutual funds they invest in by some four percentage points a year, or more, according to an annual study by the research firm Dalbar.

Lance Roberts of Real Investments Advice provided his perspective in his post on Dalbar, 2016: Yes, You Still Suck At Investing (Tips For Advisors):

  • In 2015, the average equity mutual fund investor underperformed the S&P 500 by a margin of 3.66%. While the broader market made incremental gains of 1.38%, the average equity investor suffered a more-than-incremental loss of -2.28%.
  • In 2015, the average fixed income mutual fund investor underperformed the Barclays Aggregate Bond Index by a margin of 3.66%. The broader bond market realized a slight return of 0.55% while the average fixed income fund investor lost -3.11%.
  • In 2015, the 20-year annualized S&P return was 8.19% while the 20-year annualized return for the average equity mutual fund investor was only 4.67%, a gap of 3.52%.

He also points out that:

The biggest reason for underperformance by investors who do participate in the financial markets over time is psychology. Behavioral biases that lead to poor investment decision-making is the single largest contributor to underperformance over time.

Too many investors follow the crowd and too many investors fear losing capital. What was a bit surprising to me is that there are not too many investors. Very few people participate in the stock market. Here’s why:

Unfortunately, between weak economic growth, stagnant incomes, rising costs of living and two major “bear” markets; nearly 80% of Americans simply are not able to participate as shown by numerous studies and statistical facts over the last few years:

  • According to the Pew Research Center, the median income of middle-class households declined by 4 percent from 2000 to 2014.
  • The Pew Research Center has also found that median wealth for middle-class households dropped by an astounding 28 percent between 2001 and 2013.
  • There are still 900,000 fewer middle-class jobs in America than there were when the last recession began, but the population has grown significantly larger since that time.
  • According to the Social Security Administration, 51 percent of all American workers make less than $30,000 a year.
  • An astounding 48.8 percent of all 25-year-old Americans still live at home with their parents.
  • According to the U.S. Census Bureau, 49 percent of all Americans now live in a home that receives money from the government each month, and nearly 47 million Americans are living in poverty right now.
  • In 2007, about one out of every eight children in America was on food stamps. Today, that number is one out of every five.
  • The median net worth of families in the United States was $137, 955 in 2007. Today, it is just $82,756.
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