“The investor’s chief Problem, and even his worst enemy, is likely to be himself”
– BENJAMIN GRAHAM
(Investing Legend and mentor to Warren Buffett)
I am constantly reminded of the relentless obsession most investors harbor for “Finding Alpha” in their investing strategy – most people believe that the only way to meet with long term financial success is to hunt for investments which will allow them to “beat the market”. I often marvel at the amazing amount of time and energy that most investors spend on the pursuits of investment selection and timing in the quest to find “alpha” in their investing strategies.
The problem is that the evidence shows that the average investor is failing miserably at this pursuit, and that most of that time and energy is wasted. There is a market research firm called DALBAR which annually publishes a report on investor behavior and returns, which has become well known in the wealth management industry. Year in and year out for the last 20 years, this study has shown that investors consistently underperform their own investments. In fact, the most recent study found that the average equity mutual fund investor an average annual return of 4.9% for the 10 year period through 12/31/17, while the S&P 500 achieved an average annual return of 8.5% per year over the same time. Yes, it is staggering but true: the average equity fund investor earned a full 3.6% per year less than the S&P 500 over the last decade!
The average equity fund investor earned a full 3.6% per year less than the S&P 500 over the last decade!
Historically, these numbers have remained pretty much constant: over 10 and 20 year periods, the average equity fund investor consistently manages to capture just about half of the return of the index. In a society that has become obsessed with “outperformance”, the average investor is not only underperforming the market: He is underperforming his own investments!
Why does this happen? Probably because Benjamin Graham was right – investors are their own worst enemies. Research shows that the human brain is wired in such a way as to make us naturally terrible investors, and all humans are hard wired to jump in and out of their investments at all the wrong times and for all the wrong reasons. The dominant factor in long term, real life financial outcomes isn’t so much investment performance, as it is investor behavior.
For most people, the “hunt for alpha” amounts to nothing more than chasing windmills. It is a dangerous distraction from what really matters, which is designing and implementing an appropriate written financial plan, following your plan all the time, and managing your temperament as an investor.
If you have been your own worst enemy, we can help!