DIY Investors Usually Flop

Submitted by Adam D. Koos on Monday, March 26, 2012 - 3:00pm
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Do-it-yourself investors, even those with finance degrees and MBAs, don’t do very well running their own money. You’d think that, with all the information available on the Web, TV, tablets and smart phones, they would master the market. But they usually fail.
 
I’m not one of those financial advisors who says: “It’s not possible to manage your own portfolio.” It is possible. You just have to a) enjoy it, and b) spend a few hours on your portfolio each week. The problem is that, if you don’t like doing it, you probably won’t spend time on it. Furthermore, you most likely won’t like the results of a portfolio if you spend no time on.
 
The average DIY investor finds his brain backfires on him. The more information he has, the worse the performance of his portfolio. 
 
According to a study by research firm Dalbar, investment returns between 1991 and 2010 show that the average investor didn’t do as well as the market. The Standard & Poor’s stock index had an annualized rate of return of 9.14% yearly.   
 
The average investor’s performance: a mere 3.83%, just a touch above the inflation rate (2.77%).
 
It gets uglier when you put it into dollars and cents:
 
·         If the average investor started with $10,000 back in 1991, he or she ended up with $21,084 at the end of 2010.
 
·         $10,000 invested in the S&P 500 back in 1991 became $57,081.
 
But wait. What if we ignored the stock market altogether and put our money into bonds? That’s what a lot of people are doing lately, burned by the 2000-02 and 2007-09 bear markets in equities.
 
Well, for those two decades, the Barclay’s Aggregate Bond Index returned 6.89% per year. What about the average investor? Yep, you guessed it. Not so good, at a dismal 1.01%. That 2.77% inflation passed these market participants as if Apolo Ohno was skating at the kiddie rink. Money market and savings accounts are returning only a little less these days. And they do so without the stress that comes with investing in the bond market.
 
Why is this happening? Psychology.
 
Studies have shown that as the market rises, investors get enthusiastic and pour their money into stocks; they are buying at high prices. But when the market falls and prices get lower, they sell out of the market. They’ll say, with panic in their voices:  “I want to get my money back before I lose more." 
 
Investing is the only business in the world where people throw money at it when prices are high, and want their money back when prices get low. That’s a little counterintuitive.
 
So what’s the solution? Professional financial advice. Look for an experienced financial advisor or portfolio manager to interview. Set up appointments with three to four different advisors, ask them all the same, good questions, and follow your hunch.  
 
With all that said, averages are just that – “averages.” Just because the average investors’ portfolio has sucked wind for the past 20 years doesn’t mean your portfolio is out of shape. You may be among the lucky few who have done well on your own.
 
If your diversified portfolio clipped along at anywhere between 5% to 9% annually this past 20 years, give yourself a pat on the back, but forego the celebratory steak dinner. There’s no guarantee you will do as well going forward. If you think inflation hasn’t eroded your moolah enough this past 20 years – get ready for erosion in the coming 20. Either way, it pays to have an expert help you out.
 
Adam Koos, CFP, is founder and president of Libertas Wealth Management Group in Columbus, Ohio.
 
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indexes are unmanaged and may not be invested into directly.
 
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