An Investing Fact that Will Make Your Jaw Drop
Here's the best piece of investing advice you're likely to receive this year.
Forget about your portfolio. Literally.
That's no mere metaphor or lame investment joke. Sadly, enough, it's an assertion backed by research.
Fidelity commissioned a study to discover which type of investors fared best with the company. The answer?
Those who had forgotten they had an account at Fidelity.
Think about that for a second. The best returns went to people who weren't even aware they were investing. It would be hilarious -- if it weren't so depressing.
If there was even an argument against being too hands on with your portfolio, there it is in a nutshell.
How does the average investor stack up?
Primum non nocere. In Latin, it means "first, do no harm." It's a fundamental principle in bioethics every health care student learns. Yet the application of this mandate travels far beyond medicine. It's particularly relevant in the investing realm.
Why? Simply put, most of us are lousy investors. Invariably, we buy higher than we should. We then sell lower than we should -- especially at the first hint of market turbulence.
Advisor Richard Bernstein ran two decades of market data to get a handle on just how poorly the average investor fares. The results were predictably sobering. The average investor was outperformed by almost every asset category. From 1993 to 2013, energy, health care and consumer staples all returned well into the double digits. The S&P 500, REITs and hedge funds were just a tick below double digits.
The average investor? His returns were a bit more than two-percent. Enough to narrowly edge ultra-sluggish Japanese equities. Yet not enough to even outperform cash (in the form of T bills).
The lesson here? The average investor could have done vastly better by buying and holding virtually any asset class.
Still not convinced? Let's take a look at someone who can't escape the public eye -- Donald Trump. By any measure, Trump is ultra-wealthy. He claims a net worth of $10 billion.
Yet recent media reports have noted that if Trump had taken his $500 million net worth in 1982 and invested in an S&P 500 index fund, he'd be worth $20 billion today.
That's right -- he would have been better off retiring 33 years ago and letting the market do the work.
Action Plan: How do I avoid hurting my own portfolio?
First, do no harm -- if financial advisors ever develop their own oath, these words should go right at the top. They apply equally to the average investor. Historical data shows that the market doesn't just beat us -- it trounces us.
So how do we turn this to our advantage? Here are a few steps to consider:
- Funds tracking the S&P 500 have been around since 1976. If you haven't considered investing in one, now is the time.
- There are a variety of different funds from which to choose. Most investment firms (Fidelity, Vanguard etc.) offer one.
- Contrary to popular belief, not every fund is the same. Management expenses vary from fund to fund.
- These expense ratios impact returns, so consider this variable carefully. If all things are equal, shop around and go with the cheapest option.
- Another option is an exchange traded fund (ETF). These also track the market, but can be traded like a stock.
- If you're looking for more liquidity and lower fees, an ETF is a good choice.
- You don't have to refrain from buying and selling stocks. Yet how you choose to invest should be informed by the knowledge that a long-term, market-tracking approach has proven highly effective. A smart investor can integrate a variety of tactics into his overall strategy.
Investors are often their own worst enemy. Yet we can mitigate our tendency toward crippling mistakes by following a strategy that focuses on long-term wealth creation -- and the avoidance of short-term overreaction.