Education & Workforce Development

BULLS & BEARS: Investors' actions mean lower investment returns

April 4, 2005

Have you been an investor in stocks for 20 years? Since the demographics of this paper show that the average subscriber has household income of more than $220,000 and is 48 years old, the answer is probably, "yes."

Over 20 years, the S&P 500 has returned 10.3 percent per year, which means that $40,000 invested in stocks in 1984 would now be worth $280,000.

The problem, though, is the market returned 10 percent, but Average Joe Investor only earned 7.9 percent over that same period of time. This means, assuming you're similar to Joe, your $40,000 only grew to $180,000.

Ouch, a $100,000 haircut!

John Bogle, the head of Vanguard Funds, released these findings in his recent book, "The Mutual Fund Industry 60 Years Later: For Better or Worse."

He used cash flows in and out of mutual funds and determined that, since many investors pile in near the top due to greed and then sell out near the bottom due to fear, their long-term results were 20 percent below average.

By definition, average is just that-runof-the-mill, a grade of C. By Bogle's findings, though, Joe Investor has a dunce cap on with a grade of F. Pretty pitiful.

So why, in this day and age of more educated investors, lower investment costs and rapid-fire flow of information, can't investors even keep up with a C student? I would venture some of the reasons are mentioned in the previous sentence, and you can add to those the good old standbys of greed and fear.

What? Aren't market education, lower trading costs and real-time information all good things for investors? Well, I guess they are all good things, but the use of them certainly hasn't helped Average Joe's bottom line.

The problem is that a little bit of education, a lot of information and cheap commissions allow greed and fear to grab the steering wheel and take control of a portfolio.

Back in the old days, I think a typical investor had more patience and would stick with a discipline longer. Today, if your fund or portfolio isn't near the top of the class of the 20,000 other funds or money managers out there, a few clicks of your mouse can move you to a better one.

And what's the cost to move? Dollar wise, probably peanuts if the funds are on a mutual fund "supermarket," or maybe a few bucks for stock trades through a discount broker or, if it's a "wrap account" at a major broker, the cost is covered by the fee. So why not change?

The big cost, though, may not manifest itself for years, and that cost is belowaverage returns, a bad report card and $100,000 left on the table.

Joe Investor chases the hot sector, hot fund or hot money manager, and nearly always jumps from the cool one to the hot one at the wrong time. After a decade or two of this hottie hunt, Joe wakes up one day wearing his very own dunce cap.

There are managers who beat the averages over time; maybe not every year, but over multiple years.

If you invest with a quality outfit that follows a discipline, has a decent longterm record, has the people who built the record still at their desks, and you don't give them three years to show you the money, then welcome to mediocrity, Joe.



Dave Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, a money-management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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