I don’t care how wealthy you are.
$20,213,879 is a staggering amount of money.
Losing that kind of money can easily sabotage ALL your financial plans. It can throw everything you’ve ever wanted for you and your family out the window.
But saving that kind of money can make the impossible suddenly possible. It can open windows of opportunity that you never knew existed.
In other words, $20,213,879 is a life altering sum.
And yet, smart people just like you throw that kind of money down the drain over time without realizing it.
The scary part? It can happen to anyone.
One of the most important investment studies you’ll ever read
Every year, an independent market research firm named Dalbar does their annual study called the Quantitative Analysis of Investor Behavior (QAIB).
The name might sound complicated, but the study’s premise couldn’t be simpler. It’s to measure how and why money flows in and out of mutual funds.
Dalbar investigates how living, breathing investors with real portfolios buy funds, sell funds, and switch funds over short-term and long-term timeframes.
In every QAIB study since the first one performed in 1994, Dalbar has found the following:
“The average investor earns less — in many cases, a lot less — than mutual fund performance reports would suggest.”
So the average investor does worse than we might expect.
But how much worse?
How to trail the market by 7% every year
Let’s look at the study’s 30 year results.
That sounds like a long time, but it’s not when it comes to investing.
Because unless you are in your 60s and plan to leave nothing to your kids, you’ll be investing for a lot longer than 30 years.
For the 30 years ending December 31, 2014, Dalbar found that the average equity mutual fund investor earned 3.79% per year.
That 3.79% is what real people’s dollars in mutual funds earned.
We aren’t talking hypothetical mutual fund performance numbers.
But for that same period, the S&P 500 earned 11.06% annually.
The market averaged just over 11% per year, yet the average mutual fund investor earned just under 4% per year.
How can there be a shortfall of over 7% every single year on average?
Why smart people lose money and do nothing about it
Dalbar’s results reach the same conclusion year after year. The average mutual fund investor earns FAR less than the market.
So why don’t the results change? Why don’t people learn from their mistakes year after year?
Is it because the average equity fund did so poorly? Call me crazy, but if the stock index returned 11% a year, you’d have a hard time believing stock funds did poorly.
Is it because investors picked the wrong fund? On average, it’s impossible for all investors to pick the wrong fund.
Here’s why the gap exists:
The average investor took money out and put money in at precisely the wrong times.
During up markets, they piled in. During down markets, they stampeded out. It was the people, not the portfolio, that messed everything up.
Human nature ruined three decades of stock market returns.
The easy way to make $20,213,879
Imagine it’s January 1, 1985. You are an average equity mutual fund investor from the Dalbar study (I know you don’t like being average, but pretend just this once).
You invest a million bucks. (If that’s too high or too low for your taste, just add or remove a zero.)
Like most investors, you make investment decisions based on reactions to market ups and downs over 30 years. You open your December 2014 statement and you are downright exhausted.
It reads $3,052,568. Not too shabby, but not great considering the stress.
Now let’s go back to January 1, 1985 again.
But this time, you wake up feeling lazy. So you invest your million in the S&P 500 and reinvest all dividends. You never make a change and never peek at your account for 30 years.
What is your December 2014 statement balance?
Someone call the doctor! Missing every episode of Seinfeld was (almost) worth it.
$23,266,447 from $1 million at 11.06% (S&P 500)… minus $3,052,568 from $1 million at 3.79% (Mr. Average Investor)… equals $20,213,879.
There’s the jaw-dropping math you’ve been waiting for (or skimmed down to read).
So bad behavior didn’t just cost you 7% a year…it cost you over $20 million in 30 years… that’s $675,548 a year.
How to close the behavior gap
Dalbar’s study concludes that:
“Investment results are more dependent on investor behavior than fund performance.”
Read that again. It might be the most important investment tip you ever get.
Dalbar argues (with real data) that fund selection can’t matter that much in the long run. What matters is what you do after you buy a fund.
So is the answer to just buy index funds? That’s a good start, but you can still buy high and sell low with index funds.
But how do you make sure you don’t make those mistakes that blow up most of your return?
Hire a financial advisor to coach you out of making big mistakes at market highs and lows
You don’t have a problem. Statistically, we all have a problem. It’s a human nature problem, not a portfolio problem.
And the solution to our problem is behavioral coaching.
What might a financial coach charge to solve your 7% problem every year? Probably around 1% annually.
So what are you waiting for?
But don’t take my word for it. Just ask Warren Buffett.
Forget the Dalbar study.
Just ask Warren Buffett (who probably never read the study) if his $60 billion of investment experience brought him to a different conclusion:
“It won’t be the economy that will do in investors; it will be investors themselves.”