Why Does the Typical Investor Continue to Underperform?
About the author: Chris Abts is the President & founder of Cornerstone based in Reno, NV. He helps people to better manage their wealth so they can focus more of their time on what truly brings meaning and fulfillment to their life. Abts is also a best-selling author and TV show host of Redefining Retirement, which airs every Sunday evening at 5:30pm on KTVN Channel 2.
According to Dalbar, which is the leading independent expert for evaluating, auditing and rating customer performance, the average equity investor has earned an annualized return of 3.64% over the past ten years, while the annualized return of the S&P 500 during the same time frame was 6.95%. Without a doubt, the average investor has more information at their fingertips today than ever before, so why do they continue to significantly underperform the benchmark?
According to the data, there are several reasons for this significant underperformance. Based on Dalbar’s extensive auditing of investor behavior, here is what they have discovered. The first reason is due to poor timing decisions. For example, buying into an investment or the market at its peak and bailing out at its bottom. All too often, the money is going in the wrong direction. The second reason is taxes. The benchmark, otherwise referred to as the S&P 500, is not affected by things like phantom income taxation, whereas, the typical investor can unknowingly subject him or herself to these types of stealth taxes.
Other factors such as making emotion-based decisions and following the “herd mentality” can also negatively impact investor returns. Additional reasons include the fees, expenses, charges and turn-over costs involved with securities and investments. For example, the Wall Street Journal did an article titled, “The Hidden Cost of Mutual Funds” which states that hidden costs inside a portfolio can make an investment fund 2 or 3 times as costly as advertised.
Based on this data, the average investor typically does not have a process to filter out myths and misconceptions or the steps to identify all the critical facts necessary to make logical, fact-based financial decisions that are in their best interest. As a result, they usually don’t know the important questions to ask and the problems to solve, such as how to quantify hidden fees, taxes and investment risk & return issues, before moving forward and making those important financial decisions.
That is what makes Cornerstone different. As a fiduciary based firm, we believe in identifying all the facts necessary to make a sound financial decision that is in your best interest before moving forward and making that decision. We use a forward looking, process to help you to learn the questions to ask and the problems to solve, to identify all the critical, must know information, before you move forward and make those important financial decisions. If you are ready to take back control and get on a path that leads to financial freedom, give us a call. We look forward to hearing from you.