Ross Polking Thumbnail Photo

Most investors believe successful investing involves outperforming the market. Forget the fact that for investing to be truly successful, it must help you achieve your goals, not merely be a number with no context or simply better than some benchmark…that’s an entire topic for another day. Many investors attempt to outperform the market through an active management approach. Bad news for those in this camp…overwhelming evidence demonstrates that this strategy fails much more often than it wins. The continuous trading of securities and trying to find what’s hot while avoiding what’s not, for the purpose of generating gains, adds significant risk and expense while frequently delivering lower overall return. Sounds like a lot of work for no reward.

Dalbar, Inc., one of the most-recognized national financial market research firms, facilitates an ongoing study of investment returns versus investor returns (note that these are different). The study results continue to highlight a daunting disparity not in favor of the average investor. The primary driver for this disparity is investor behavior and most investors’ penchant to buy high and sell low driven by their emotions over current market conditions, what they read in the paper that morning or what their good friend’s brother heard in his workplace lunchroom.

Per Dalbar’s findings, over the past 30 years, the S&P 500 has returned over 11% per year while individual investors have averaged somewhere in the range of 3.5% – barely above the level of inflation. Over this time, a $10,000 initial investment for a buy-and-hold S&P index fund would amount to an approximate ending balance of $267,000, while the average investor would bank less than $29,000. This wide gap is, again, attributable to most investors’ excessive trading and timing efforts and the significant expenses that accompany such tactics. Of course, you might be saying, “That’s not me, I’ve held the same mutual funds for years.” What many investors may not realize in this situation, though, is that the fund managers, themselves, are actively trading the stocks held in their fund, resulting in added costs and, potentially, increased taxes and lower returns. Do your homework and ask your advisor direct questions about how your funds are managed. Could be a game-changer for you.

Some food for thought as you wrestle with the context of these numbers: Research initially conducted by Gary Brinson, L. Randolph Hood and Gilbert Beebower in 1986, and confirmed again in 1991, demonstrates that focusing on asset allocation is the key determinant driving portfolio performance. Asset allocation is the decision—or series of decisions—an investor makes to determine the strategic mix of asset classes (i.e., stocks, bonds and cash) employed in their portfolio. In this groundbreaking study, allocation decisions explained more than 90% of the difference in return earned by the investors studied — while an investor’s ability to select the “right” stocks and time markets accounted for only 5% and 2%, respectively. Again, active management strategies endure a black eye. Disciplined asset allocation enhances returns, whereas attempts at individual stock selection and market timing detract from performance, more frequently than not. And the appropriate allocation? Completely determined by one’s goals, priorities, preferences and circumstances. Investors must financially plan, not just invest. Otherwise, how does one know the answer to the question 99% of Americans have: How much do I need in order to retire comfortably?

Long-term, disciplined investing in alignment with one’s goals and plan creates the highest probability for success. That’s the formula. Stay diversified.

PLEASE NOTE LIMITATIONS: Please see Important Educational Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.