“Plans fail for lack of counsel, but with many advisers they succeed.” ~Proverbs 15:22
The Bible has over 2,000 verses about money. It is a subject so vital in the Holy Scriptures that Jesus talked about money in His parables more than He talked about Heaven and hell.
With the advent of discount brokerage houses, investors have the opportunity to manage their portfolios without paying a fee to a financial advisor. Some fees allow for trades as low as $3.95. Of course, there are also no load mutual funds, and ETFs that allow for cost efficient ways to invest in stock and bond markets without the necessity of paying an advisor. Compare these fee structures to A-share mutual funds with their 5.75% up front charges, and 0.25% 12b-1 fees or stock transactions that require a maximum 2.5% commission. Even if one uses a fee based advisory, s/he is looking at an annual fee that can go as high as 1.35%.
One would think that this would give the individual investor an advantage, eventually, if they do not have to pay these fees, but the annual Dalbar study of “Quantitative Analysis of Investor Behavior” shows a different result.
The table and chart below the annualized results of individual investors against traditional benchmarks. The results are shocking, yet not surprising.
The average equity investor has average an annualized return of 4.25% in the last 20 years. If one compares this to the S&P 500 index, this is nearly 4% less than the annual return of the large cap index. Similar underperformance can also be seen for 3, 5, and 10 year periods. The story is the same for fixed income investors. Over the last 20 years, their returns have averaged 0.98%. Not only is this over 5% less than the return for the Aggregate index, it is well below the rate of inflation, the ultimate enemy to one’s money. If one had been willing to use the advice from professionals, there would not be such a woeful lack of performance.
Why does this happen? The theory is that the average individual investor does a terrible job of timing the market, which is generally not a good idea in the first place. It is typical for the average individual investor to rush in with new money in a rising market, when they should be tapering, and pulling out of a down market, when they should be investing new money. This is the exact opposite of the old adage of, “Buy low, sell high.”
What can an advisor do? First of all, one should remember that mutual funds have advisors, called managers, who have internal processes to adjust to market shifts. If you own a broad based mutual fund, let the managers do their job. Secondly, if you have personal advisors, let them do their job. They have access to market and economic data that the individual investor neither has the time or the want to decipher. Additionally a personal advisor can provide a barrier from the individual making critical mistakes; mistakes such as deviating from a well-structured investment plan that should respond to market changes.
The average investor is busy. S/he has a job, a family to raise, or a life to live. If you don’t have an advisor, get one. You will achieve better results.