Why Do Investors Under Perform The Equity Markets?

When dealing with investors I have heard a number of questions.  The most frequently asked is; what will the market do next?  Every one of them believes someone knows what will happen next. Investors are in constant search of the ‘expert’ that will give them the answers and ‘beat’ the market. The media makes sure you continue to believe that these ‘experts’ exist.

Investors (Photo credit: LendingMemo)

Unfortunately, there are no answers to the question; what will happen next? While investors are searching for the right answer they lose money unnecessarily.

This is evidenced by the Dalbar research study which looks at individual investor performance over a 20 year period. The latest study revealed that the 20 years ending December 31, 2012 average annual performance S&P500 earned 8.21% while the individual investor earned 4.25%.

Why the difference? It can partially be explained by the investors search for the best entry and exit point. This is called market timing and it doesn’t work.

These investors are looking for stock market returns with Treasury bill risk and what they end up with is Treasury bill return with stock market risk.

The invisible hand of the market sets prices more efficiently than any other process known to man.  Is it perfect?  Indeed, No.  There is no perfect price; only what a willing buyer and seller negotiate.  The market instantly incorporates the collective mind of every market participant.  Free markets work.  Unfortunately, most investors never tap their real power.

Many prefer the apparent stability of real estate investing. They conclude that there is much less or no volatility in real estate investing. What these investors don’t realize is that equities remain the greatest wealth creation tool on the planet. That’s right equities are the greatest wealth creation tool on the planet IF they are used properly.

What investors also don’t realize is that one of the advantages of equities is actually why investors prefer asset classes like real estate. That advantage is liquidity. Equity owners have access to their investments nearly immediately. That means they can look up the price at any moment that the markets are open.

This opens these investors up to sometimes large short term down swings. These swings result in some emotional decisions, like panicking and selling during a downturn. It can also result in buying at a high when there is frenzied buying. Real estate investors do not have this ‘luxury’. Basically real estate investors believe….. If I don’t see it, it can’t hurt me.

Stop trying to beat the market and let the market forces work for you. Treat your portfolio like you would a real estate investment. Be patient. This will be accomplished by

  • Own equities and high quality fixed income.
  • Globally diversify.
  • Rebalance.

These 3 simple rules will lead to a successful investing experience.

In most if not all cases this will require the help of an investor coach/fiduciary adviser. Your coach will help build the right portfolio for you and most importantly keep you disciplined.

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