Why Are Many Investors Frustrated with Their Investment Performance and Experiences?

While the last two years have been particularly frustrating for investors, this is not a new phenomenon.  We believe that this is due to the optimistic expectations which investors tend to have and to their poor  investment results compared to those expectations. 

According to a survey conducted by Scudder Kemper Investments in 2001, the typical investor has very optimistic expectations about “reasonable” returns on investments.  The following chart shows that investors on average believe that reasonable returns are 21.7% per year.

The expectation of 21.7% is far above the historical average of 11.0% gains for stocks for the last 75 years. Moreover, when you look at any 15-year periods over the last 75 years, there has never been a 15-year period in which  stocks have earned more than 21.7% (Source: Ibbotson).   In addition, the 21.7% is far above the 16.0% average return of the last fifteen years ending 12/00, which covered one of the biggest bull markets of all time.

While these optimistic expectations can lead to frustrations, they can lead to other problems.  If people base their retirement plans on these optimistic expectations, it is likely that many will be disappointed in the size of their assets at the time of retirement.  These people may fail to create an income stream that they cannot outlive.   We prefer that clients plan more conservatively and be pleasantly surprised when the results turn out to be much better.  (See our investment outlook.)

According to a Dalbar study that analyzed investment performance over the last fifteen years, the average equity fund investor earned 5.3%.  In the following chart, it is interesting to note that the Dalbar study indicates that the average investor has under-performed not only stocks, but also bonds and treasury bills.

... But Actual Investor Returns Were Low
Annualized Returns - 1984 through 2000
Source: Scudder Kemper Investments 2001 Stocks = Wilshire 5000, Bonds = Intermediate-Term Bond Index T-Bills = Treasury Bills, Investor = Average Equity Fund Investor This is for illustrative purposes only and not indicative of any investment.

While it has not been determined exactly why the average investor has performed so poorly, we believe that it is due to four reasons.  First, many investors trade too often.  Second, they chase performance - they get into hot sectors or hot stocks too late.  Third, the typical investor invests too emotionally - they buy after the market has gone up too much and sell after the market has gone down too much.  Fourth, many investors are under-invested in stocks or equity mutual funds.

We believe that our understanding of the tendencies of investors is important in helping clients realize their retirement objectives and dreams.  An important aspect of our role as an investment advisor is to provide the perspective, judgment and wisdom to enable clients to create a sound investment and retirement plan and stick with it.

In general, we encourage our clients to invest for the long term and not trade too frequently.  We discourage clients from looking at performance over the last quarter or year to use that information primarily to determine what mutual funds or investments to select for the next period.  In the midst of bear markets, we try to reassure clients so that they do not jump out of the stock market at the wrong time.  Similarly, we try to not get too optimistic at the high end of bull markets.  Lastly, as you can read  in other parts of the web site, we encourage most investors to have an equity focus in their portfolios. 

When you combine unrealistic expectations with poor performance, it is not surprising that investors are frustrated with their investments. We try to set realistic expectations and discourage clients from actions which tend to hurt investment performance. We can help you realize your objectives.  Call 734-996-5912 for an appointment.

Securities offered through Mutual Service Corporation, Member NASD/SIPC. Investment advisory services offered through Pattern Recognition Management, Inc., a registered investment advisor.

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