There is a great website out there called Behavior Gap. They often have interesting sketches that simplify many complex concepts, and today, they came out with one that explains a big problem that the typical investor experiences, the gap between what investments return and what investors actually get.
As Dalbar points out, the S&P 500 returned an annualized 9.22% over the past 20 years, while the average mutual-fund investor earned just 5% per year. This underperformance gap of 4% is attributed to investors trading far too much, and often at the worst times, by buying at the highs and selling at the lows. Our role here at Parabolic Asset Management is to help close this gap for investors.
Here is the text straight from Behavior Gap:
“Each year, I’d read a report from a firm called Dalbar. They published annual data about average investor and investment returns. But something odd kept happening each year. The numbers didn’t match.
The average investment return was bigger than the average investor return. In other words, investors were leaving money on the table. What was happening?
Pretend for a minute that you have a mutual fund with a 10-year-average return of 10 percent per year. That’s the investment return. If you put your money in the fund, kept it there for the entire 10 years, and didn’t add or take out any money, then your investor return would also be 10 percent. So in this very hypothetical example, the investment return and the investor return were the same.
The problem is that few people invest this way. Who would buy a long-term investment and actually hold on to it for the long term? That would be silly!
This difference led to the sketch that started it all, the Behavior Gap. I had no idea it would change my life, but I hope that it continues to have the power to help change other people’s lives, too.”
(Posted December 11, 2014)
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Rainier Trinidad, CFA
San Diego and Coronado’s Fiduciary Financial Advisor
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