finance

Why does the average investor routinely under perform even a broad market index?

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If you have been concerned with investments or managing your money for any good amount of time, you have probably come across the statistic pertaining to performance of individual investors against a broad Index like S&P 500, and are aware that it doesn’t look pretty. This has been true across time: viz. as highlighted in the study conducted by Dalbar Inc., the average investor earned about 5.19% per annum for 20 years ending 2015 vs. 9.85% per annum earned by the S&P500 in the same time. There are other studies which show that investors in mutual funds with top quartile performance also end up earning less than half of the funds’ returns over time. Some of you can probably can testify through your own experience as well!

The reasons also have been explained time and again as you may find in the article below which well summarises many of the behavioural roots of the problems faced by the average investor.

https://www.thebalance.com/why-average-investors-earn-below-average-market-returns-2388519

While the reasons cited are true and valid, I believe one needs to delve deeper to unearth the underlying causes of the stated destructive behaviours commonly displayed by the investors as a whole.

Apart from the standard fear and greed syndromes that we all feel to some degree, I feel that one pertinent driver of pulling the wrong trigger at the wrong time is also contributed to in no small manner by a pressure that a vast majority of people routinely feel. This pressure is the result of either inadequate savings or starting the process of savings and investments fairly late in their lives (often both together). That way, the time available to the investors before they retire becomes shorter and they need to have the market behave in a certain way. Obviously, the markets seldom oblige to such demands.

It is vitally important to start saving early in life, which would go a very long way in pre-empting the majority of the factors that end up pushing us to lose both our cool and our money. Obviously we all have obligations and aspirations to fulfil. But let me state here a maxim which has helped me a lot in this area once I started earning. In my college 4th year before graduation, I had this Professor of Economics who time and again used to say: “Remember, savings is your first expenditure!”

That kept me well-grounded and helps me out till today!

I am sure it can serve everyone just as well as it has served me! And believe me, it’s not as difficult as it may sound in the beginning.

 

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