Are You the “Average” Investor?
“We have met the enemy and he is us.” Pogo (comic strip), 1971
Dalbar Study of Investor Results:
- Over 20 years the average U.S. stock fund investor trailed the index averages by 4.2% per year.*
- Over 20 years the average U.S. bond fund investor trailed the index by 5.0% per year.*
*Per 2014 edition of DALBAR’s Quantitative Analysis of Investor Behavior
– Copy available upon request
Despite being in the financial services business for over 25 years, I almost never meet someone who sees themselves as the average investor. So here is a quick test for you (answer Yes or No to each question):
- In late 2008 and early 2009 (when U.S. stocks declined by almost 50%), did you systematically sell the strong performers (bonds or bond funds) and purchase the weak performers (stocks or stock funds) to keep each at a predetermined percentage of your portfolio-(merely doing nothing during this time period does not count as a yes)?
- In the late 1990’s (1996 through 1999 as U.S. stocks increased by about 75%) did you systematically sell stocks or stock funds (especially technology stocks) and buy bonds or bond funds to keep each at a predetermined percentage of your portfolio?
- Today, are you continually reducing the very strong performing U.S. stock portion of your portfolio and buying the weak(er) performers of international stocks and international stock and bond funds to keep each at a predetermined percentage of your portfolio?
Did you answer “yes” to each and every question? Unless you can clearly find your “yes” to each question, you my friend are an “average investor”!
So what does it mean to be the “average investor”?
- In the moment, you will have the comfort of the crowd, and you can share your recent returns in cocktail party conversations. You are the envy of your friends and family!
- Because of the difficulty that the average investor faces in achieving acceptable average returns (please refer to the beginning of this writing for DALBAR study results), you should reduce your expected returns over the next 20 years by a significant amount……something in the range of a 4% to 5% annual return reduction should do it.
- If you are periodically stress testing the ability of your income and your assets to pay for the life you wish to live (using a sophisticated analytical tool known as “Monte Carlo Simulation”), you should significantly increase the variance of your expected annual returns. Remember, you like to be in the hot area – and you don’t like to be in an out of favor area – and this requires a lot of big changes.
At this point you may have decided you don’t want to be the “average investor,” but instead choose to follow a disciplined portfolio allocation in good and bad markets. If that’s the case, then here is what your world looks like.
- You might wish to avoid the cocktail party conversation on hot investment trends and the investment category that is generating the highest returns recently. Your story is more routine and likely involves portfolio holdings in out of favor areas.
- You, your investment adviser and your financial planner can make conservative estimates on the level and volatility of future returns when it comes to planning your life.
- You have given yourself a great opportunity to avoid the experience of buying high (owning the hottest sector or asset class) and instead enjoy the benefits of buying low (having that disciplined allocation to what everyone agrees has recently been a lousy investment area).
The choice is yours- always and ongoing. I only hope you work with an adviser who has YOUR best interests in mind and tries to help you make prudent decisions.
T. Taylor Payne, CPA/PFS, CFP®
Grandfather (Papa), Red Rocks Hiker, Golf-a-holic
Investment Manager, President
No forecast can be guaranteed. The views expressed are those of the Payne Wealth Partners Investment Committee and are subject to change at any time. These views are for informational purposes and should not be relied upon as a recommendation or solicitation or as investment advice.