Don’t be an itchy investor!

The “average” investor is bad at investing. And I mean really bad! According to the long-running DALBAR analysis, “results consistently show that the average investor earns less – in many cases, much less – than mutual fund performance reports would suggest.”

Compared to general asset classes, the average investor earns a relatively low 3.6% in annual returns on average

But why is that? In my experience, it’s because of commitment issues. Unskilled investors constantly tinker with their portfolios, adding a dash of this asset or removing a dollop of that one in hopes that they’ll eventually stumble upon the secret sauce that has (supposedly) eluded them up until now.

So, as I tell my fidgety 2-year-old, “stop it! Just stop it!” Analyze, decide, and then commit. Otherwise you risk falling down a rabbit hole; and unless you’re just plain lucky, that won’t end well.

“But wait!” you may protest, pointing back at the above graph. “Look at the obvious advantage of assets like real estate and emerging markets. I’d be an idiot not to get a piece of that action!”

Well, perhaps. Those figures for REITs and EM equity are certainly impressive, and come from very reputable sources. But this is hardly the first time such data has hit the presses. Tons of investors have seen similar figures in years past, and drawn a similar conclusion: “Holy cats! I really gotta get into Asset X!”

Yet after they do, they still fail to push their overall returns over that 3.6% average. The reason for this is very simple, and best illustrated by the following:

The annual returns of key asset indices have varied dramatically over the last 20 years

Compared to the previous chart, this one is kind of dizzying. Although it displays very similar data, it takes a much closer look at it… and kind of blows apart the conclusions drawn from the first one as a result.

If REITs and EM investments were as obviously profitable as that first chart made them appear, then they should consistently show up in the top rows (or at least the top half) of this one. But, um…

The annual returns of real estate and emerging market equity have varied dramatically over the last 20 years

…they don’t.

Now I’m not saying that you should never tweak or try to improve your portfolio. What I am saying is that beating the market is a fool’s errand – and part of my job is to remind my investors of that. Perhaps that is why Vanguard calculates a financial advisor’s added value (above and beyond their fee) to be between 2.1-3.95%.

— Graham