DO-IT-YOURSELF INVESTORS UNDERPERFORM

According to Dalbar, Inc., a Boston-based market research firm, the average equity investor severely underperformed the S&P 500 index for the 20-year period ending December 31, 2013.  Retail investors achieved an average annual return of 5.02% for that 20-year period, compared to 9.22% for the S&P 500.

Financial columnist Howard Gold states that retail investors continue making the same mistakes, including chasing “hot” returns, buying triple-leveraged ETFs, and trading too frequently.

To be fair, many of us have been conditioned to fall into the performance trap.  Take a look at almost any financial publication and you’ll see what I mean.  We’re constantly being told about the five funds we must own now, or the best funds for weathering a down market, or the top sector funds.  Let’s face it — performance sells!

Unfortunately, it’s this same mindset that gets investors into real trouble.  I’ve been working with clients from all walks of life and income levels for 22 years, and I’ve come to realize that most people approach investing backward.  They put the cart before the horse.  Most investors want to talk about returns before they want to talk about budgets, debt, goals or current savings.  This is like walking into the doctor’s office and asking for a pill before the doctor even knows what’s wrong with you! But this is what we often see when talking to clients or prospective clients.

While I’m talking about the performance trap, let me say that many financial advisors are guilty of the same thing, and thus doing their clients a real disservice.  They “sell” their ability to outperform the current advisor or some benchmark, and when they fail to do so (and they will sooner or later) the client fires them and moves on to the next advisor who tells them the same story, and the process repeats itself.  In the meantime, the client is no closer to reaching his or her goals (which often have never been clearly defined in the first place) and is growing more and more frustrated.

DEVELOP A PLAN

Before you start investing, you should first take the time to understand where you are financially and where you want to go.  What does your budget look like?  How much are you currently spending to cover your essential living expenses? How much will you need to spend in the future?  How much money will you need to have set aside by some future date to do whatever it is you need or want to do?

In other words, you need to have a plan.  Part of this plan is determining what rate of return you’ll need in order to meet your goals. This is largely a function of what you’ve saved thus far, combined with your ability or willingness to continue saving at an appropriate level.  If you are unable or unwilling to save enough, the market will never generate a high enough return to bail you out.  It simply won’t happen!

Once you have a plan in place and know what kind of return you’ll need, you can then invest accordingly.  For example, why are you chasing double-digit returns year after year if your plan tells you it isn’t necessary?

A good financial advisor will take the time to help you develop an appropriate plan and then match your investment strategy to it.  He or she will also be willing to listen to you — and sometimes this means disagreeing with you and saying things you may not want to hear.  Ultimately, a good advisor will help you overcome the one variable that derails most do-it-yourself investors: human emotion.

LET US HELP WITH YOUR PLAN

At RAA, we’d like to help you build a plan to help you reach your financial goals.  Give us a call at (800) 321-9123 to get started. We’d love the opportunity to sit down with you and get to know you.

We understand it can be difficult to trust someone with your financial future. You don’t have to take our word for it — our clients would be happy to discuss their experiences with you. Request a reference to hear firsthand what working with RAA is like for clients just like you.

Disclaimer: This blog is intended for informational purposes only and should not be construed as individual investment advice. Actual recommendations are provided by RAA following consultation and are custom-tailored to each investor’s unique needs and circumstances. The information contained herein is from sources believed to be accurate and reliable. However, RAA accepts no legal responsibility for any errors or omissions. Investments in stocks, bonds, and mutual funds may increase or decrease in value. Past performance is no guarantee of future results. Any of the charts and graphs included in this blog are not recommendations for the purchase and sale of any security.