I just came across yet another report (Marketwatch) demonstrating the abysmal state of US retail investor performance compared to basically doing nothing. We just can’t help ourselves. Based on this latest research of 20 years of data, here are a few depressing facts:
- Over the past 20 years, while the S&P500 annualized return was 8.2%, the average retail investor returned 4.3%. That’s really pathetic.
- Reason #1 – Market timing (article calls it emotion-based investing). Basically, people are unable to just leave well enough alone. Rather than having a strategy and sticking to it, they find the need to pretend as though they can predict the future and buy when stocks are low and sell when they’re high.
- Reason #2 – Fees. Investors also believe actively managed mutual funds will outperform the indices, which they don’t tend to do. They chase high past returns which really have no correlation whatsoever to future returns. It’s just luck (read “Fooled by Randomness” if you don’t believe me).
- Reason #3 – Turnover. Actively managed funds have higher turnover which further reduces returns.
Recent Evidence of Horrible Decision-Making
Gold. I’ve said it before and I’ll say it again; aside from a small portion of a portfolio as a purported inflationary hedge, gold is pretty much useless. It generates no income stream, has very little industrial use compared to other precious metals and was really just the result of a bubble over the past decade. Yet retail investors went nuts buying into physical gold, ETFs, gold mutual funds, etc. When your mom starts asking if she should buy gold, that’s when it’s time to sell. Well, well, it’s down 27% on the year vs a gain of 13% on the year for the S&P500. All the “experts” are citing old dips saying gold will still rally to $4000/oz in the next few years, etc., but they just look sillier by the minute. Logically, if gold at a higher value down the road were such a sure thing, why wouldn’t it be moving up instead of down? That’s just plain foolish. It’s called dogma. The facts and logic don’t matter.
We saw the same with retail investors buying Apple and we’ll probably see a new wave of real estate euphoria as well now that home prices have finally shown a trickle up. Bitcoin is another ridiculous phenomena; people are dumping their life savings into what may turn out to be the most prolific internet hoax of all time (and what’s to prevent anyone from making the next Bitcoin, thus rendering the current system useless?).
It’s easy to look back and say “told ya so” for anyone. But what’s not so easy (as Americans demonstrate time and time again) is to have a strategy and stick to it. During the 2008-2009 financial crash, I didn’t adjust my 401(k)
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