Why Does The Average Investor Consistently Underperform His Own Investments?

What does that actually mean?

Over the last 20 years the average return of the S&P 500, which is 500 of the most successful companies in the United States, has been approximately 11%. The average investor holding an S&P 500 mutual fund with those same companies has averaged a return of approximately 5%. You can pick almost any 20 year period and this relationship remains constant. Over 20 year periods the average mutual fund investor consistently manages to capture less than half of the return of the average mutual fund.

In a society that has basically turned outperformance into a religion, the average investor is not only underperforming the markets, he is consistently underperforming his own investments!

How can that be?

He could've just bought the mutual fund, threw the statements away each month without looking at them and he would've gotten the 11% that fund averaged over the last 20 years. He didn't do that though. Instead he did a lot of other things which:

were almost always the wrong thing to do
were done at the wrong time
were done for the wrong reasons

The average investor consistently blows around 60% of their investment returns by behaving inappropriately at the wrong times for the wrong reasons.

Here are some examples of what he actually did:

He bought funds with the best recent "performance."
When those funds stopped "performing" he switched into the next hottest fund. (he probably did this numerous times.)
In 2008, when the market dropped approximately 50% he panicked and went to cash.
During a presidential election his candidate didn't win so, in fear, he moved his money to bonds because bonds are "safe."
He got most of his financial information from the news which gets paid to sell him headlines and not history.
He didn't work with an advisor so that he could "save" money by not paying an advisor fee.

These are some of the classic mistakes the average investor makes and why he consistently not only underperforms the market over 20 year periods but underperforms his own investments.

What I want you to take away from this is investor behavior > investment performance.

Investment performance is almost irrelevant

Meaning that it has no significant effect on the long-term, real-life returns of real people. The dominant determining factor is the investors own behavior. Over a 20-30 year retirement what do you think your chances are at not making any of the mistakes listed above? The statistical answer is almost zero. Without an advisor you stand almost zero chance of not wrecking your retirement portfolio.

You lost over 60% of your returns but believe you "saved" money by not paying an advisor. A side note. A typical advisor charges 1% to manage your retirement portfolio. At 80/20 Financial we charge less than 1%... we charge 0.75% which I hope you can see now is a bargain and worth multitudes more than that.

If all an advisor ever does over your 20 -30 year relationship with them is to keep you from making one "big mistake" he would improve your lifetime returns by 60%. Not by outperforming an index, but by managing behavior. Take all the time you need to let that sink in because it's powerful and liberating. A good financial advisor doesn't cost you money, he saves your money.

Our mission is to increase your time, money and peace of mind by helping you create a retirement income and investment plan that aligns with your goals while guiding you through the completion of that plan year after year.

You need a plan

At 80/20 Financial Services, we are retirement planners and we specialize in working with electric cooperative employees. We can help you answer questions like:

Should you take your cooperative's monthly pension or lump sum offer?
Do you have enough money between your R&S and/or 401k to retire?
Could you possibly retire at age 55?
Is your cooperative 401k invested correctly for your retirement goals?
Should you be investing in a Traditional 401k or a Roth 401k?
Are you contributing too much or too little to your 401k?
Should you quasi-retire from your cooperative?
Should you accept an early retirement offer from your cooperative?
When should you claim Social Security benefits?
How can you lower your tax bill in retirement?
How do you invest your retirement money so that you increase your income in retirement?
How do you create an income stream in retirement that is similar to when you were working?

I started this firm specifically to help electric cooperative employees with retirement planning. I worked for an electric cooperative for 11 years and I know your profession and benefit plans better than any other financial advisor will. You have excellent retirement benefits available to you. I can help you optimize those benefits while creating a retirement income and investing plan that aligns with your retirement goals.

For more articles about retirement planning and investing, click here. You may also sign up to receive our weekly retirement blog here.

Thanks for reading!

Brian Coleman-Owner/Advisor

80/20 Financial Services is an Independent Registered Investment Advisor (RIA) registered in the state of Missouri (CRD# 300772). We help clients in Missouri and throughout the United States prosper in retirement. Being independent allows us to work exclusively for YOU.

Our specialty is retirement planning for electric cooperative employees within 5 years of retirement or already retired.

*We will also work with the families of cooperative employees.

Photo by Daniela Holzer on Unsplash