Yes, the Market Is Always Beating You
Tuesday, 7/28/2015 18:40
Wishful thinking starts with buying what you wished you already owned...
FEEL like the market's always beating you?
asks Greg Guenther in Addison Wiggin's Daily Reckoning.
That might be because it is always beating you. You're about to learn why. And more importantly, how you can get out of that nasty trap...
The inflation-adjusted average annual return for the S&P 500 over the past 80 years or so is about 7%. So through bull and bear markets, long-term investors should be averaging about 7% per year. Not bad. With compounding, that's a truckload of money over time.
Except most investors aren't coming close to that. Instead of 7%, the average investor usually books an annual return closer to 3%. That's less than half!
Forget beating the market. Most investors can't even come close to matching it.
Why? The answer will surprise you.
The No. 1 reason the average investor can't book average returns is because he buys what he wishes he'd already bought.
That big idea is from Mark Yusko, CEO of Morgan Creek Capital Management. And it needs a bit of an explanation...
Investing is an epic battle. It's you versus the market. But it's also you vs. yourself. You're fighting all those counterproductive signals from that speck of grey matter that passes for your brain – and those "gut instincts" you swear made you a killing on that one big trade.
Even the best investors are emotional creatures so you're probably no exception. You see a red-hot stock's performance and it sets off your greed glands. You start imagining all the money you could have made if you just bought five years earlier when it first popped up on your radar.
But you made excuses. You wanted to see if the initial move higher held. Or you wanted to wait for a pullback that never came. Or maybe your psychic said it didn't align with Saturn. Whatever. The results are still the same.
You wished you'd bought at some point in the past. And that wish has led to an irrational need to buy now so you don't miss the next big move. So you buy now. That's fear taking over – the fear of missing out. Emotions win again. And it usually ends poorly. That stock's biggest gains are probably behind it.
Or the opposite could happen. You got burned on a stock five years ago you swore you'd never touch again. But it's since gone to rehab and delivering some big-time returns. Doesn't matter. You still won't go within a hundred feet of the thing. Your emotions have taken over – fear of loss this time. And so you miss out on a steep gain.
Of course there are other reasons why Joe Investor is falling behind.
He's buying the wrong stocks – then falling for the biggest lie in investing and throwing good money after bad. And he's too greedy at market peaks while too cautious near the bottom. These are boneheaded mistakes investors make all the time. And I think they both help explain the awful underperformance we're talking about today.
That brings us to another big question: Are investors making this same mistake today? Are they buying what they wish they'd bought years ago? Yusko thinks so...
Mark recently pointed out that there's a record amount of money going into index funds right now. The last time that happened? The year 2000. Yep, the very beginning of the dot-com bust.
I'm not surprised. Your average investor is always too late to the party. The punch bowl's about dry when he shows up.
Don't get me wrong – we'll ride this bull until it bucks us off. But jamming all your money into index funds in the sixth year of a historic bull market while fewer and fewer stocks are participating in the rally probably isn't the way to go. That's why we've been so selective lately.
If you want to match the market – and hopefully beat it – you've got to stop wishing, and start thinking.
You can't wish your way to riches.
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