Humans are not wired to be successful long-term investors.<\/p>\n\n\n\n
We are too emotional, have too many biases, and frequently make decisions outside of an established, disciplined framework. At the end of the day, we listen to \u201cour gut\u201d too much.<\/p>\n\n\n\n
To be a successful long-term investor, one needs to inhabit the exact opposite traits. We should approach investment decisions dispassionately, with a disciplined process, and devoid of emotion and bias. Of course, that\u2019s easier said than done.<\/p>\n\n\n\n
For me to say investors are prone to missteps probably does not strike many readers as newsworthy. There is plenty of research affirming this point. For instance, the research firm DALBAR has been publishing their Quantitative Analysis of Investor Behavior <\/em>report for 30 years, and it consistently shows that retail investors are underperforming markets. DALBAR\u2019s report compares the returns equity markets are delivering versus the returns investors are realizing. There\u2019s consistently a gap, and the 2024 report was no exception.1<\/sup><\/p>\n\n\n\n According to DALBAR, the average equity investor underperformed the S&P 500 Index by 5.5% in 2023, marking the third-largest performance gap in the last decade. Underperformance was seen in the fixed-income realm as well, with the average fixed-income investor underperforming the Bloomberg Barclays Aggregate Bond Index by 2.63%. The research continues to indicate that emotional decisions are hurting investor returns. Investors sell during downturns and miss rebounds, and they get overconfident during strong rallies. Both actions tend to hurt returns.<\/p>\n\n\n\n Zooming out to 20-year returns, the average equity investor earned an annualized return of 8.7% according to DALBAR, while the S&P 500 Index has delivered an annualized return of 9.7% over the same period. This 1% difference in annualized return may not seem like much, but on a $1M initial investment, it would mean having roughly $5.3M at the end of the 20-year period for the average investor, instead of $6.3M. Simply put, that\u2019s huge.<\/p>\n\n\n\n As I mentioned previously, investors may be aware of this issue already. What\u2019s new, however, is research suggesting that the problem may be getting worse.<\/p>\n\n\n\n A finance professor at George Mason University analyzed all return data for U.S. dollar-denominated mutual funds over the last 10 years, separated actively managed funds from index-tracking passive funds, and then looked at the difference between the stated annual return and the actual dollar-weighted return in the fund (known as the return gap). This gap is very similar to the one published by DALBAR\u2014it shows the average return for the fund versus what the average investor actually experiences.<\/p>\n\n\n\n This new study confirmed what DALBAR has been saying for decades\u2014that the average investor underperforms. What\u2019s different is the level of underperformance observed from 2015 to 2019 (pre-Covid) compared to 2020 through October 31, 2024. In the pre-Covid period, poor market timing cost investors 0.53% per year. In the post-Covid period, however, that number nearly doubled to 1.01%. Interestingly, the area where investors are seeing the most damage to portfolios is in actively traded small-cap funds, perhaps because of information being scarcer and volatility being more prevalent. The average return gap was 0.62% before Covid, but it has grown to 1.38% since.<\/p>\n\n\n\n While this is consistent with DALBAR\u2019s long-term finding, the more recent study suggests that the trading practices that have become popular in the wake of the pandemic\u2014whether it\u2019s day-trading, being actively engaged on discussion boards, experimenting with options and other derivatives, etc.\u2014are costing investors dearly. As far as I can tell, these \u2018trading strategies\u2019 are only becoming more popular, which means the risks to investors\u2019 long-term returns could continue growing over time as well. <\/p>\n\n\n\n Bottom Line for Investors<\/strong><\/p>\n\n\n\n The retail investment community was relatively strong and growing before the pandemic, but there is a good argument that stimulus money and more time spent at the computer\u2014combined with the proliferation of trading platforms and discussion forums\u2014has catalyzed retail investor participation. Generally speaking, I view this trend as a good thing. It means more people are investing in markets, which hopefully enables more people to generate wealth over time.<\/p>\n\n\n\n The research cited above suggests that many investors are missing the forest for the trees. Instead of owning equities long-term because investors want to participate in value creation and earnings growth, they\u2019re focusing too much on daily price changes, event-driven market news, or the latest social media investment buzz. That\u2019s the opposite of a long-term, disciplined approach, and it\u2019s costing investors.<\/p>\n","protected":false},"excerpt":{"rendered":" The retail investor community is growing, which is positive. But the focus on daily price changes, and social media buzz is detrimental to long-term investor success. <\/p>\n","protected":false},"author":4,"featured_media":9971,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[181,1],"tags":[],"class_list":["post-9970","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-professionals","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9970","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=9970"}],"version-history":[{"count":4,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9970\/revisions"}],"predecessor-version":[{"id":9975,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9970\/revisions\/9975"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media\/9971"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=9970"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=9970"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=9970"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}