you quick to pull the trigger when you think the stock
market is going to attack the money youíve worked so
hard to amass?
your behavior is probably costing you a fortune, and you
might want to hesitate the next time you think you
should grab your money and run for safety.
financial research firm Dalbar has recently quantified
what nervous investors have cost themselves. During the
last 20 years, a simple investment in the stock market
would have provided an 8.19 average gain per year. But
the average person with stock mutual funds ended up with
only 4.67 percent annually, Dalbar found. The firm
studied returns for 20 years through the end of 2015.
major reason why people earn so little, according to
Dalbarís analysis, is that people yank money from
their investments when losing. After all, the stock
market ó or the Standard and Poorís 500 Index ó
doesnít actually gain 8.19 percent each year. Thatís
merely the average. Itís a blend of horrifying losses
like the 38 percent loss in 2008, with the sweet gains
of 30 percent in 2014, and everything in between. For
the last 20 years, or even the last 89, there have been
more ups than downs in the stock market. So the person
who pulls the trigger when spooked usually misses many
of the delightful gains that show up without warning.
analysts looked at when money flowed into and out of
mutual funds that invest in stocks and bonds. And they
compared those findings to the stock market and money
going into money market funds. Money market funds, of
course, are one of the safe places where people park
money when they are worried.
other studies have come to the same basic conclusion as
Dalbar: People are awful at guessing when the spooky
times and the delightful times in the stock and bond
markets will come and go. And that costs them dearly.
Even the smartest investment pros have a terrible track
record with guessing. So rather than make futile
guesses, financial advisers typically tell clients to
expect losses at times, but to stick with mixtures of
stocks and bonds in good times and bad. Typically, bonds
help protect people from losses when the stock market
analysis blames panicking and selling during stock
market losses as the major issue for investors. It
accounts for 44 percent of the difference between the
4.67 that individuals earned in their stock funds and
the 8.19 percent that the stock market would have
bestowed, Dalbar reports. Another 15 percent is lost
because people hold onto their cash after the stock
market has tanked, and then they miss the opportunity to
make money as stocks rebound.
mistakes donít simply exist in stock fund investing.
Dalbar found that while the Barclays Aggregate Bond
Index earned on average 5.34 percent a year over the
last 20 years, investors in bond funds earned just 0.51
Dalbar blames investor decision-making for most of their
lagging returns in stock and bond funds, thatís not
the only problem. Fees also erode returns. The analysis
blames fees for 22 percent of lost opportunity.
some people donít realize it, they are always paying
fees when investing. Thatís true whether they invest
in 401(k)s and IRAs, go straight to a mutual fund
company, or buy funds and individual stocks and bonds
from a broker or financial adviser.
have also have lost the opportunity to make the full
8.19 percent average annual gain in the stock market
during the last 20 years because there are times when
they donít invest.
theyíve lost their job, or are saving for a house down
payment or sending children to college," said Louis
Harvey, president of Dalbar. Those times away from stock
fund investing explain another 19 percent of the erosion
in investorsí ultimate returns.
observers, such as financial planner Michael Kitces,
have faulted Dalbarís methodology and the size of the
losses itís reported. Critics also claim that the
study has been a delight to financial advisers, who use
it to convince individuals that they are dummies who
need help from a pro.
they donít argue that market timing gets individuals
into trouble. A 2014 Morningstar study showed
individuals lost 2.5 percent through bad timing with
mutual funds. Morningstar has also shown that the pros
have their weaknesses, with few funds staying
outstanding over several years.
the message from all the studies is to beware if you
think you know when to flee or jump into the stock
market. Further, beware of any pro who claims he or she
can do it too.