Learn from the Mistakes of Other Individual Investors: Don’t destroy yourself. Part 1

Just shoot me.

Better yet, I’ll just shoot myself.

That’s what the average investor often does, many financial professionals say.

As markets were on a roller coast ride recently, somedays dropping more than a thousand points, financial pros cautioned that average investors are easily spooked.

Joe Blow average investors wrongly jump in and out of markets as they boom or crash.

“Performance changing is dangerous to your wealth,” says Chris Brightman, chief investment officer of Research Affiliates.

Market pros say the investor indecision scenario is very common.

Joe Blow Arrives Just in Time for the Bad Times

Another crash may or may not be coming. But it is only now individual investors are starting to come back into market. That’s even though the years after the crash of 2008 have been great, says one money manager.

“It is nine years into the bull market and yet only now are people finally realizing that there is a bull market. I find that incredible,” says Richard Bernstein, a money manager with his own firm.

That means, he adds, the average investor missed a huge stock market run-up.

Bernstein isn’t predicting a crash this year but points to the dangers of switching investments at the click of a set tuned to CNBC or a baying Jim Cramer.

So indecision has meant that most individual investors, financial pros say, haven’t reaped the benefits of the last decade’s boom.

For instance, before the latest market storms this month (February 2018), a low-cost S&P 500 fund recently had earned an incredible 15.87% a year over the past five years. And even over 10 years, which would include part of the horrible 2008 year of the crash, the average fund has earned 9.77%, according to the Vanguard Group.

But flighty investors, over the past decade, were nowhere near between nine and 15 percent. They received the same returns “as low yielding cash equivalents,” Bernstein says. Cash was trash recently, yielding one percent or less.

The Illusion of Wealth

When you get one percent or less a year, your money, your buying, which represents your ability to buy goods and services, declines. That’s because the historic long-term rate of inflation has been about three percent a year.

Inflationary monetary policies are the result of central banks making decisions, not based on economic, but political criteria, issuing too much money. (Here one can revisit the records of former Fed chairman Arthur Burns and Alan Greenspan, among others).

You have the illusion of wealth because you have more dollars or Euros in your wallet or bank account, but your ability to buy the things you need and want goes down because your money grew, but not at a healthy pace.

Why do markets go up but the individual usually gets garbage returns?

No Patience for a Full Market Cycle

Average fund investors, says a fund tracking firm, hold a fund for too short a period. This “strongly suggests that investors lack the patience and long-term vision to stay invested in any one fund for much more than four years,” according to Dalbar’s “Quantitative Analysis of Investor Behavior.” This is an annual report that monitors investor behavior.

“Four years is not nearly enough for a full market cycle, notes Cory Clark, head of research at Dalbar. He adds fund switching, even if it is only wrong a few times, say 25 percent of the time, destroys performance.

You miss some of the biggest days in the market because you were switching. And another factor hurts performance: Getting in and out of stocks of funds generates transaction costs. You don’t get nearly the returns you could have had you stuck to an effective plan.

As an example, in the 30-year period between 1986 and 2016—a period of ups and down but primarily ups—the S&P 500 returned 10.16% a year. But the average skittish equity investor only received 3.98%, Dalbar said.

So why do so many individual investors take the wrong steps? Why do so many individual investors have ants in their pants?

GregoryBresiger.com will answer this in the segment, which will be here in a day or two.

About The Author

Gregory Bresiger

Gregory Bresiger is an independent business journalist from Queens, New York. His Personal Finance articles have appeared in publications such as The New York Post & Financial Advisor Magazine. He is the author of the eBooks “Personal Finance For People Who Hate Personal Finance” and “MoneySense”.