After reading and digesting the devastating results revealed in the DALBAR report, I want to do everything in my power to help you avoid being part of that horrific statistic.
To quickly refresh your memory, and to ingrain these numbers and their effects in your mind, here’s what DALBAR’s study on the results for the 20 year period ending in December, 2010 revealed:
- The Average annual return of the S&P 500 Stock Market Index from 1991 thru 2010 was 9.14% (including dividends reinvested)
- However, the average annual return of the “average” equity mutual fund investor (not investment, but an investor, i.e. a person) over the same 20 year period was 3.83%
- The Average annual return of the Barclays Aggregate Bond Index from 1991 thru 2010 was 6.89%
- However, the average annual return of the “average” bond mutual fund investor (not investment, but an investor, i.e. a person) over the same 20 year period was 1.01% (a difference of 85.3% per year).
What these numbers tell us is that, while the S&P 500 Market Index delivered a strong average annual return over those 20 years of 9.14%, the average stock mutual fund investor (a person, not an investment) only achieved 3.83%!
That means that the average equity investor’s return was 58.1% less than the broad market index each and every year!
There are many, many reasons why social security statistics continue to demonstrate that only 6% of Americans are financially independent at retirement age, and can continue their same standard of living throughout their retirement years.
This DALBAR report illustrates a huge one!
The wonderful news out of all of this, however, is that it’s completely within your control to close this performance gap.
This ugly performance gap is not the result of bad investments or bad markets.
They are the direct result of poor investor strategy and behavior (action or inaction), all of which you have the ability to control!
Enjoying the relaxing retirement that you’ve worked so hard for and deserve requires not only action on your part, but resisting the allure of the wrong actions taken by the overwhelming majority of retirees.
In this blog entry, I’d like to walk you through one of the reasons why this awful performance gap exists so that you can avoid being a victim.
And, after the record breaking month we’ve just witnessed, this is especially appropriate right now!
Performance Gap Reason #2: Riskless Euphoria
What exactly do I mean by Euphoria, and how does it apply to investing?
Well, it’s the financial equivalent of “rapture of the deep” which is a phenomenon that overtakes scuba divers when they dive down really deep.
Divers get completely blissed out and they lose any adult sense of danger.
The same thing occurs with investment Euphoria.
When you’re in The Euphoria Zone, there’s a complete loss of the idea that principle loss is even a possibility.
The best way to identify this in anyone, including yourself, is when their identification of loss, or their definition of risk, is being outperformed by somebody else!
They completely lose sight of their objectives and their plans and, instead, are attracted to the bright, shiny object of someone hitting a temporary investment home run.
When all you’re worried about is somebody making more money than you are, you’re in The Euphoria Zone.
What they lose sight of completely is the fact that in order to achieve higher and higher rates of return, they must take on greater and greater amount of principle risk.
1997 to 1999: The “New” Economy
The classic example of this was from 1997 through 1999 when people bought internet stocks at price multiples of 75 to 1!
Even those who were earning good rates of return doing what they were already doing. But, that didn’t matter because others were earning more so they jumped into the pond without a second thought about the potential ramifications.
2005: Real Estate
Another example of this was real estate in 2005. There was no price that was too high to pay for a pre-developed condo in Boca Raton, or Naples Florida because they just knew it would double in price in 3 years!
In hindsight, we now know what the result of this is. Condos in those towns are now selling for 25 to 40 cents on the dollar. I have a friend who bought a condo in Naples for $429,000 that he can’t sell today for $160,000!
What essentially occurs in The Euphoria Zone is the complete loss of any sense of risk at all. None.
And, that’s one of the biggest mistakes that leads to irrational investing and the horrific results revealed in the Dalbar Report.
Stay out of the trap!