Lost Decade for the Stock Market

“The last 10 yrs, I haven’t made any money in the market.” I heard this comment from a friend of mine recently over a cup of coffee, and I’d thought I’d share my response.

Maybe it’s the “way” you invest.

According to a reports conducted by Morningstar & DALBAR investors themselves may be responsible.

First, Morningstar estimates that the average fund’s investor return is several percentage points lower than the total returns (their report showed -35% less return – HERE for the article). Investors are losing more money because of poor timing than from anything else (like expense ratios), making an advisor a good investment – there’s value in helping investors avoid these types of mistakes, Morningstar says.

Furthermore, the industry is set up to promote bad investor behavior – by launching numerous funds in hot sectors, according to Morningstar. This induces investors to buy near peaks.

Second, DALBAR conducts a study each year to re-confirm this fact. For the last 20-year period, equity fund investors averaged 3.17% compared to 8.20% for the S&P 500.  That’s a 5% per-year short-fall in the average investors’ returns.

Why does this happen? According to DALBAR most investors do not achieve good returns due to their irrational behavior [such as chasing performance, buying high, selling low, not have a written financial roadmap].  Sounds a lot like the results from the Morningstar repot above.

Maybe it’s “what” you invests in.  

We keep hearing about the "lost decade for the stock market." This is partially true – if you invested ONLY in the S&P500 for the last 10 yrs, you’d average 0.6% return per year, positive, but not great (through September 31, 2011). Thus – the Lost Decade for Stocks story was born.

However, if you invested in a diversified portfolio your results would be dramatically different. For example, a portfolio of 5 different asset classes, weighted equally would result in +4.5% per year  (S&P500, International Stocks, Bonds, REITs, Commodity) over that same “Lost Decade.”

I’ve always believed an advisor’s biggest duty is to “save investors from themselves.”  Research from Morningstar & DALBAR shows that to be the case. Warren Buffett supports this too by stating good investment results come from putting a plan together & sticking to it through tough times (it’s the “sticking” part that’s hard, Buffett says).

One final thought – Your lawyer, doctor, & accountant all have a Fiduciary Duty to put your interests ahead of their own. Most brokers DO NOT. If you decide to seek professional advice, look for a CFA, an RIA who has Fiduciary Duty to put your interests ahead of their own. I always like to say – you can be first (Fiduciary relationship), or you can be last (brokerage relationship).