Why You Think You Can Beat the Stock Market, but Really Can’t

DALBAR, an independent research firm, recently published a 20-year study that illustrates how the average investor has fared compared to the market as a whole. According to the study, the average stock-fund investor has achieved an annualized return of only 3.83% from 1991 through 2010. Had these investors simply invested their money in the S&P 500 (composed of large U.S. company stocks) and forgotten all about it, they would have achieved a 9.14% annualized gain.

Keep in mind that investing solely in the S&P 500 isn't maximizing the diversification in an investor's portfolio. After all, the S&P 500 doesn't include small and mid sized companies, or international stocks. History tells us that over long periods of time, a diversified portfolio should outperform a non-diversified portfolio.

Even a simple buy-and forget strategy with bonds would have achieved greater returns than what the average stock fund investor achieved over the last 20 years. An investor who simply held the Barclays Aggregate Bond Index since 1991 achieved an annualized return of 6.89%, and encountered much less volatility and risk than the average stock investor was exposed to.

Consider the difference between an investor earning an average annual return of 3.83% as opposed to 6.89% or 9.14%:

 

$100,000 Invested At Different Growth Rates

Rate of Return

3.83%

6.89%

9.14%

10 Years

$145,622

$194,702

$239,794

20 Years

$212,059

$379,089

$575,014

30 Years

$308,805

$738,095

$1,378,854

Notice the growth in the funds invested at the 3.83% return that the average investor achieves. It should be readily apparent that a 3.83% return is simply not enough growth to provide most of us with anything near the retirement we strive for. So how do we avoid being "an average investor?"

This study illustrates that investor behavior is the biggest culprit causing individuals to achieve below average performance. No single mistake explains this poor performance. Rather, there are a combination of errors repeated over and over - mistakes that can be overcome by simply implementing and adhering to a disciplined investment strategy.

About the author

Lon Jefferies, CFP®, MBA
Lon Jefferies, CFP®, MBA

Lon Jefferies is an investment advisor representative with Net Worth Advisory Group, a fee-only financial planning firm in Salt Lake City, Utah. He is a Certified Financial Planner (CFP®) and a member of the National Association of Personal Financial Advisors (NAPFA). He possesses an MBA and bachelor's degrees in Finance and Marketing from the University of Utah. Lon writes articles for local magazines such as Utah CEO, Business Connect and Utah Business Magazine, and he consistently contributes articles to online magazines such as FIGuide.com and FILife.com (by The Wall Street Journal). Additionally, Lon is an expert author at EzineArticles.com. Lon has been quoted nationally in publications such as the NY Times and Investment News.

Lon can be contacted at (801) 566-0740 or lon@networthadvice.com. Learn more about Net Worth Advisory Group at http://networthadvice.com and visit Lon's blog at http://www.utahfinancialadvisor.blogspot.com.

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