Saturday, October 10, 2015

why investors underperform the market

The stock market has averaged compound total returns of about 9% a year over the last 100+ years. This means a doubling of your money about every eight years.

When your money doubles every eight years on average you will eventually become very wealthy. And that’s only if you match the market returns. Surely, some investors should beat this "average" return by a substantial amount.  So why aren’t there more rich and ultra-rich investors if it really is that easy?

The sad truth

The sad truth is, it is not that easy.

On paper, investing is very simple. But we don’t live on paper.

Real-life investors (unless you are a robot, that is you) greatly underperform the market.

Case in point: Over the last 20 years, the Standard & Poor's 500 has averaged 9.2% annual returns.

Individual investors have averaged returns of 5.0% a year over the same time period according to the 2014 DALBAR QAIB Study.

There is no reason at all individual investors should greatly underperform the market – but they are.

The most important investing risk is you

The reason individual investors fail to beat – or even match – the market is because we fail to follow a consistent strategy when times get tough.

Simply put, we panic.

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