I wanted to give some reflection on my experiences this week as a presenter at a local financial literacy/education event. I have been presenting in this program for several years, and year after year I do tend to see the same faces. The audience is predominantly made up of very educated and accomplished individuals. While presenting at this event is enjoyable, it has taken a lot of work to prepare for.
If we look at the Dalbar QAIB study (a study that looks at investor behavior and returns), the state of the average investor is, well, sad. Over the past 20 years, they calculate that the average investor has made less than half the return of the S&P 500. So, even in my classes of highly educated people, there are probably some attendees that have done great, the other half have likely preformed poorly. (However, they would not admit to this). Education and earning ability has no bearing on your investment success.
Making a change in one’s investments is a huge undertaking, both mentally and even emotionally. All sorts of emotions come into play. Below are a few issues that may be present in they way you are currently invested. These issues keep many investors trapped in mediocrity.
1) You are not diversified. True diversification is rare. And unless you can quantify it, you can’t prove you are. Can you?
2) You use active management. This flawed philosophy has been debunked by academia. If you are not a stock picker, your mutual fund manager probably is. Have you decided on what your Investment Philosophy is?
3) You are not disciplined. Most investors are not. This is not a flaw! It’s part of the human condition. An advisor can help keep you focused.
4) You are taking more risk than you realize. Unless you can tell me the standard deviation of your portfolio, you don’t even know how much risk you are taking!
5) You don’t know your costs. You have no idea what you are paying in the form of fees, commissions, or opportunity costs.
6) You don’t know anything about the subject. You lack even basic knowledge of investing, and are perfect prey for salesmen and women of financial “products”. OR this lack of knowledge paralyses you from making ANY decisions. We believe an educated investor will always fare best in the end.
7) You don’t even know if you are succeeding or failing. You don’t even know what you should be earning. In your simple system, a positive year is a success, and a negative year is a failure. You are failing more than you know.
If you are ready, or thinking about making a change, there are always reasons why people don’t.
1) Your current advisor is your friend. I get that. If you choose relationships over results that is your choice.
2) Being penny wise and pound foolish. You think that fees are the end all and be all of successful investing. While important, I can show you a very bad, very cheap portfolio. Cheap isn’t always everything.
3) You lack the will to make the change. You don’t have the energy to look into the situation. I know. Life can be exhausting.
4) You don’t know who to trust. That being said, you just remain in frozen in your current state. Thankfully, there are some things we believe you can look for in an advisor to narrow down the search.
5) You have given up on the whole investing thing. Too much money lost; and you are not playing the game anymore. While tragic, the crashes of 02 and 08 really took it’s toll on some investors.
Do these lists resonate at all with you? While a good advisor can be a tremendous asset, ultimately your investment success is dependent on no one else but you.