Don’t Just Do Something…Stand There!

Most of us feel better when we’re doing something.

This is an unfortunate reality for investors, and it’s why most investors will achieve results far below the market rates of return. Yet again, according to DALBAR the average investor far underperformed the market rates of return during the past 20 years. Every year DALBAR picks up the results of the last year and drops one off the end, but the results are always the same. On average, INVESTORS LOSE.

CATEGORY 1991-2010 Annualized Return
S&P 500 Index 9.14%
Average Equity Fund Investor 3.83%
Inflation 2.51%


The above chart should cause you to get really serious about your invested assets or the 401k plan that you administer and the performance of YOUR money and that of your employees.

If I ask 100 people if they think they’re average, below average, or above average at say, driving. 75 to 80 people will say they’re above average. We do not like to think of ourselves as below average at anything. And yet roughly half of us are below average at every single measurable activity.

And no one wants to believe that the truth of this chart applies to them. But think about it. If the AVERAGE investor is getting under 4%, then some are getting less than that and some are doing better. Around half of all investors are doing worse than 4%!

When I analyze the funds and performance of investors I find this all the time. They consistently add money every month, yet in the end, the return—based on contributions, time invested, and their ending balance—is far below the market for the same period.

I call this the behavior gap. If the market is getting 9 and you are getting 4 then something is going terribly wrong. There is NO reason that you should underperform the market. And yet, most investors and 401k participants do just that year in and year out.

The reasons why are simple.

1. Investors and 401k participants try to time the market out of fear and greed when they should be calmly rebalancing based on a disciplined formula taylored to their needs, time horizons, and ability to handle ups and downs. Unfortunately, when investors and plan sponsors call their “advisors” during the rough spots, the advisors are as uninformed and as scared as they are. No help there. Even folks who buy index funds and then market time with them will lose in the end.

2. Investors and plan administrators chase after the returns of five-star funds. They do not know the truth about the so called “all stars.” Did you know that five-star funds never repeat their performance? After they receive their five stars, they always lose steam. Guess when most investors invest in five-star funds. Right—just after the five stars are given. When are the five stars given? Right again—after the higher-than-market returns were achieved by the fund manager. How often does a fund manager who beat the market over a short period continue to beat the market? Not often. Actually, never. Go find out for yourself, or, if you can get him on the line, call Peter Lynch, he’ll tell you himself. He beat the market 15 years in a row. He has not been able to repeat it or to find anyone who can. His “Magellen” fund has underperformed the market on average since his run in the 80s. Most investors got into his fund after the best years and as a result underperformed the market. It’s kind of like betting on Mohamed Ali to win a fight today. Great fighter. Bad timing. Don’t chase five-star funds. It’s the sneakiest trap that Wall Street sets. They are really good at making us believe they have skill when actually they just had a string of good luck.

3. Picking stocks is more like gambling than investing. Those who try to gain or beat market returns by using a handful of stocks subject themselves to single-stock risk and a flurry of emotional ups and downs. There is no evidence that even PHD-trained money managers have beat the market for as long as you would need them to in order to be a successful investor (which is around 60 to 70 years by the way). It’s also important to know that over 90% of all stock trades today are made by professionals. This is not a do-it-yourself industry. The etrade baby wants you to know how easy it is to MAKE a trade. He is totally right about that. It’s even easier than driving to Mt. Pleasant and PLACING A BET. Your odds of winning are about the same in either case, except that with stocks you can never see who you’re betting against. In today’s stock market, if you are selling a stock, it’s likely that Warren Buffet or someone like him is buying it from you. How does that make you feel?

That’s depressing. So, what’s the answer?

Well, what do we know?

~ We know that the market gives tremendous returns over time. This is a fact.

~ We also know that if we rebalance between stocks and short-term fixed income we will always be buying low and selling high. Always.

Never does a disciplined and well-coached investor have to fall prey to a bad practice or below-market returns.

Stay disciplined investors. Times like these will separate you from the weak and uninformed.

And if you care about the weak and uninformed, don’t build a wall between them and us, bring them along to our next event. Mark your calendars for October 26th at the Kellogg Center.

Don’t just do something, stand there.


This entry was posted in investing, rebalancing and tagged , , , , . Bookmark the permalink.

Comments are closed.