This Chart Shows Just How Terrible Of An Investor You Are

Typical investors achieve surprisingly poor investment results over long investment periods and might want to give up stock picking at all.

Aug 18, 2014 at 10:00AM

We all like to have a high opinion of ourselves and it is part of the human condition that we have a tendency to seeing ourselves as above-average (this is also called the illusory superiority bias and is a cognitive error we all make). And this is probably also true when it comes to investing.

The chart below, however, indicates that this really isn't the case and it gives us all a much needed reality check: The average investor is well below-average when it comes to achieving investing success.

The following presentation slide from Nuveen Asset Management compares the 20-year annualized returns from 1992-2011 for a variety of asset classes.


Source: Nuveen Asset Management, J.P. Morgan Asset Management

Real estate investment trusts, for instance, gained 10.9% annually each year, the most of any asset class, while the S&P 500, a major benchmark index, returned 7.8% on an annual basis.

Asset class returns ranging from REITs to oil and bond investments were ultimately compared to the return the 'average investor' achieved over the 20 year period and results aren't pretty: The average investor gained a mere 2.1% a year thereby hugely underperforming all other asset classes.

Passive investment strategies are superior
There is an important implication here for the average retail investor: If they invested their money in an S&P 500 index fund or an exchange traded fund that tracks the performance of the S&P 500, they would have achieved fundamentally better investment returns compared to what they actually earned. Let's be honest: A return of 2.1% per year is pretty bad.

This is a big thing to notice for investors: Instead of trading in and out of positions and chasing market returns, investors would have done much better by resorting to an investing method called indexing.

Indexing basically means investors can purchase an index fund or an exchange traded fund that mimics the performance of an underlying index such as the S&P 500 at very low costs.

Popular ETFs tracking the performance of the S&P 500 include the SPDR S&P 500 ETF (NYSEMKT:SPY), the Vanguard S&P 500 ETF (NYSEMKT:VOO) and the iShares Core S&P 500 ETF (NYSEMKT:IVV).

Exchange traded funds are traded on the stock exchange just like any other security and can be bought and sold during regular trading hours.

What about inflation?
The chart above has yet made another depressing revelation: The average investor was unable to earn the inflation rate. This is a big no-no when it comes to investing and clearly is a big disappointment.

Over time, increasing prices in an economy decrease the purchasing power of consumers. As investors we would want to at least earn the inflation rate in order to make sure that our living standard is not being eroded.

Reasons for underperformance
Why is it that the average investor achieved such dismal performance results?

Average investors often display herding behavior: They buy stocks when everybody else does and similarly avoid the stock market when nobody wants to buy stocks anymore. This 'herd following mentality' is not necessarily beneficial for investors' investment returns.

Remember Warren Buffett's old adage: "Be greedy when others are fearful and fearful when others are greedy." This is excellent investment advice and it should be your guiding investment principle.

The Foolish Bottom Line
Understand that typical investors have a tendency to buy stocks at the peak and to sell at the bottom.

Passive investment strategies such as buying an index fund or an exchange traded fund are valid alternatives to active management and, over the long-term, achieve quite respectable results.

Achieving a return larger than the inflation rate is paramount in order to protect your purchasing power, which should be a key investment goal for every investor.

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Kingkarn Amjaroen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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