Why Does The Average Investor Lose So Badly?
The average investor significantly underperformed the market in 2018.
Bad decisions caused the average U.S. investor to lose roughly twice as much as the S&P 500 in 2018 according to a new study from Dalbar, a financial services firm. While the S&P 500 declined 4.38%, according to Dalbar, the average investor lost 9.42%.
This underperformance follows a pattern that is confirmed in study after study that shows that the average individual investor underperforms in both Bull and Bear markets.
The primary culprit is trying to time the market and the tendency of individual investors to believe that they can predict when the market will go up or down. This causes them to buy when the market is high and they feel good about investing, and to sell when the market is low, believing it’s going to go lower.
The dramatic drop on April 13th triggered by fear of a trade war with China is a good example of how dramatic moves in the stock market can cause the typical investor to do the wrong thing at the wrong time. A combination of scary headlines in the press, combined with sharp drops in the stock market often causes investors to “move to the sidelines” until they feel safer. That means they miss the sharp rebound after locking in their losses.
Professional investment managers realize that market timing is a losing proposition and develop strategies that allow them to remain invested through market cycles.
Another reason why the average investor loses badly is that they tend to buy yesterday’s winners. Reading popular publications like Money Magazine, poring over lists of last year’s “best” stocks or stock funds is a recipe for failure. While mutual fund prospectuses always say that past performance is no guarantee of future success, few investors take this to heart and, buying yesterday’s winners find themselves owning today’s losers.
Korving & Company creates investment portfolios that allow their clients to ride through the ups and downs of the market while sleeping well at night.
For more information, contact us at www.korvingco.com.