Don’t be an average investor
Nothing is sacred on this blog and it seems some readers thought I was criticizing mutual funds. Not so. In fact, I have the opposite view as I truly believe that the best way to invest in stocks, bonds, ETFs or other investments is by designing a carefully selected portfolio of mutual funds that are suitable and appropriate for each individual investor.
So why is this financial adviser reporting that the average mutual fund investor has dismal rates of returns according to the latest 2012 DALBAR report?
For many years now, I had speculated that the average mutual fund investor has and continues to underperform their own mutual funds – in fact, by a large margin. Finally we now have access to some hard, real world data that supports my view.
In the 2012 DALBAR study from the U.S., researchers reported that the “average equity investor lost 5.73% in 2011 compared to the gain of 2.12% that simply holding the S&P 500[1] produced.” This caught my attention immediately. How can an investment producing a positive return be converted into a loss? How can this be? How can an investor not earn what his own investment is earning?
Bottom line, DALBAR attributed investor’s poor results to bad investment decisions (buying high or selling low), not holding mutual funds long enough, inappropriate responses to media reports, irrational behaviors etc. as some of the causes for underperformance.
DALBAR identifies the problem as not the investment – it’s the investor! According to the report, the missing or “lost” 5.73% return in 2011 is attributed to bad or inappropriate investor behaviors which sabotaged investor’s returns. It didn’t even matter if the time frames selected were short term, medium or long term.
The point of my article is not to say that fund investors do not have a chance. Or that it is particularly difficult to invest or the odds are stacked against you. It is extremely easy to earn the rate of the return the fund company gives you. The average investor just needs help!
Fortunately, I do not have any clients that are average investors. The average investor as we have seen is a flawed creature, pulled here and there by various emotional or psychological forces but not quite understanding why he drilled a perfectly good airplane into the side of a mountain. Alas, some would like to blame the airplane but in the case of investing and investments - it is on average, pilot error that likely was the cause.
And what is required to become an above average investor and make superior returns than the average guy? Hopefully, it is your adviser that can make the difference!
Don’t be an average investor! Glenn Szlagowski is a multi-decade veteran of the investment industry with past experience in the equity markets, which he applies to fixed income, GIC and mutual fund investing. Battle scarred (maybe with a few bullet holes and the odd grey hair), Glenn can help prevent you from being just an average investor. He can be reached at gszlagowski@assante.com.
[1] The S&P 500 is a U.S. index of the 500 largest stocks generally considered representative of the U.S. stock market.
[2] The 2012 DALBAR report is available from www.qaib.com for purchase. A free preview look accessible to all can be found here: http://qaib.com/public/downloadfile.aspx?filePath=freelook&fileName=fulleditionfreelook.pdf
