A study of 70,000 investor portfolios showed that in 2016 returns lagged the market by 7%!
Yes, the average investor gained 5% but the Standard and Poors 500 returned 12% over the same period.
Research company Dalbar completed a study in 2015 which showed that the average investor return over the 20 years leading up to that date (1995-2015) was only 4.67%.
What did the S&P 500 return over that same period?
It had an average annual return of 8.19%.
Well, It’s part of the behavior gap.
Financial advisor Carl Richards coined the phrase behavior gap.
In fact, he even wrote a book of the same title: The Behavior Gap: Simple Ways to Stop Doing Dump Things with Money.
One of the key premises of the book is that investor returns consistently fall behind investment returns.
The reason? Investor behavior, hence the phrase behavior gap.
How bad is it?
What causes investor returns to lag investment returns so badly?
There are 5 mistakes most investors do, and you need to avoid them if you want to be successful investor.
1. Watching or reading investment news
Drama sells. It’s a sad fact.
What if CNBC got on the air each day and said: “Everything looks good in the stock market today.”
Well, people would stop watching.
To keep people watching newscasters report drama in the market.
They spend time analyzing and recommending different investments.
They go out of their way to convince you (and everyone else) that you can beat the market by listening to them and doing what they say.
2. Trading rather than investing
Studies show that people love to think they can time the market.
They want to buy something at a great deal and sell it with a tremendous gain.
Not even professional fund managers can do this consistently.
Every time you buy or sell an investment there is a cost.
There is very often a cost to execute the trade.
Making trades versus buying and holding can eat up a lot of profits over time.
Also, when investors are trading they tend to…
3. Buy investments at a high price
Every time there is a large run-up in the stock market the cash flows into the market jump way above average.
One might even argue that part of the reason the market bubbles on occasion is this influx of buyers.
So, what’s the problem?
Well, investors tend to jump in after most of the gains have already shown up in the market.
Perhaps the stock market has been going great for a couple of years now so the investor decides they don’t want to miss any more gains and they buy-in. Right near the peak.
Guess what happens after that …
4. Selling investments at a low price
After most investors have gotten off the sideline and put their money into the market, stock prices start to drop.
Prices always drop.
And that’s okay! Market cycles are normal and expected.
There is a market correction (a drop of 10% or more) every 3-5 years on average.
Emotionally though it can “hurt.”
Even knowing that markets “correct” every few years, when you see the value of your investment portfolio drop 10% or more, it can cause stress.
Most people are good for the first few percentage points of decrease.
After a while though many can’t take it any longer and they decide to sell to avoid further “losses.”
What they don’t stop to consider is that you don’t lose anything unless you sell.
So, the loss they are trying to avoid actually gets locked in by selling! You know this.
Everyone knows this. Still, it happens, and it happens all the time.
When the market goes back up, they jump back in. This winds up in a cycle of buying high and selling low – destroying a lot of investor equity.
5. Waiting on the sideline (doing nothing)
Maybe you don’t trade. Maybe you don’t invest at all.
Perhaps you have a list of reasons not to invest in the stock market.
Just put all your money in a savings account and everything will be fine, right?
The problem there is that bank savings rates are HORRIBLE!
That’s well below the target inflation rate, which means we’re essentially losing money by having it in savings.
But, everyone should have some cash money for their emergency fund.
People talk and worry about the risk of investing in the stock market.
The fact is, we need to take time to consider the risk of not owning stocks.