Developing investor discipline, is the most important part of wealth-building.
Not even a minute of your time in school education will be spent on what the stock market is and how it can be used to generate wealth. There is no guidance on the best possible tools to accumulate wealth for retirement. It is a terrible flaw in our education system.
The results of this absence can be seen clearly in the performance of retail investors who find their way into the market.
In 2017, market research firm Dalbar completed a 30-year study of retail investor mutual fund performance for the period ending December 30, 2016. The results are depressing. Dalbar found that over the short term, medium term and long term, the results were the same. Retail investors massively underperformed the overall stock market. And the 30-year underperformance is especially devastating.
While the S&P 500 averaged an annualized return of 10.16% over the 30-year period, the average retail fund investor averaged an annualized 3.98%. The amount of wealth the average retail investor missed out on is mind boggling.
A $100,000 investment in the S&P 500 at the start of this 30-year period would have turned into $1,822,711. Instead, the average retail fund investor who invested $100,000 and earned an annualized 3.98% would have found themselves with $322,473 at the end of 30 years. That $1.5 million difference is obviously a life-changing amount of money that was left on the table by retail investors.
Dalbar concluded that the average retail fund investor underperformed due to impatience or even better: a lack of discipline. Great investors are disciplined and have the necessary patience. Or as Warren Buffett described it once: “The stock market is a device for transferring money from the impatient to the patient.”
To succeed in the market, all that a retail investor had to do over those 30 years was invest their money and then have the composure to do nothing, barring the worst circumstances. Instead, the average investor did not have the discipline to stay invested for the long term. Most of the average investors were succumbing to those two basic human emotions, fear and greed. The average investor is greedy at the wrong time and piles money into stocks at market tops. Then, when the market tanks, the average investor is fearful and exits the market at the bottom. This lack of discipline left millions and millions of investors with a fraction of the wealth that they should have gained over this 30-year period.
Therefore we should teach our children about the stock market in school. Generating wealth in the stock market is so quite easy. All you have to do is build a diversified portfolio and have the discipline to hold for the long term. Why are pupils not getting this simple lesson? It will literally make them millions over their lifetimes.