The problem of under-performance and not being able to create wealth is lack of knowledge and tools. According to research firm Dalbar, the average equity investor vastly underperforms the S&P 500 decade after decade. Even the average fixed income investor does far worse than the primary bond index, measured with the Barclays Capital U.S. Aggregate Bond Index.
Here are the 6 factors why investors underperform and do not build a legacy of wealth:
1. Lack of knowledge.
I wonder why financial literacy is not taught in schools nowadays? A subject we are confronted on a daily basis and so important for life and our well-being. As a result, pupils go out into this world without understanding basic investment terms such as asset allocation, diversification and compounding returns and have no understanding of how to turn low-yielding savings into a high-returning investment portfolio.
2. Poor delegation.
If you don’t have a fiduciary relationship with your advisor, you are almost certainly dealing with a salesperson whose primary job is to convert a substantial percentage of your assets into the firm’s assets and as commission into his own pocket.
3. Performance chasing. Don’t put all your money into the next hot thing. This might work out for a while but not forever. Without a disciplined sell strategy, buying whatever is rocketing higher can have devastating consequences.
4. Market timing.
Reading the market and being in it for the rallies and out during the downturns is wishful thinking. Anyone can make a good call now and then but believe me, doing it consistently is not possible. Market timing leaves you vulnerable to being out of the market for the upturns and in during the downturns. And that destroys your overall performance.
5. Panic-selling.
Financial markets do suffer periodically and without warning from dramatic corrections, bear markets or even crashes. Investor’s tend to move onto the side-lines until things look better. The problem is that stocks move up well in advance before the outlook improves and that leaves you missing out when the market suddenly recovers and moves strongly and quickly into the right direction.
6. High fees.
What you don’t pay in expenses is yours to keep. The goal is for you to make money from your investments and not your broker/financial advisor or fund manager. Believe me, in most cases you do not get what you pay for. The vast majority of professional money managers cannot outperform an unmanaged benchmark. So why paying for underperformance, when you can get a better performance for a lot less or nothing.
Unfortunately, people often lack the knowledge and experience necessary to reach their most important financial goals, including a secure retirement.
Sven Franssen