This Chart Shows Just How Terrible Of An Investor You Are

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.

Boost your returns with the top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 18, 2014, at 5:06 PM, bdh2067 wrote:

    Great insight and useful data. Thank you.

    There's a world of difference between long term investing and the stock trading that most people seem to consider "investing." Another great Buffett quote along these lines is, "if you don't want to own stock in this company for 10 years, why consider it for 10 minutes?"

  • Report this Comment On August 18, 2014, at 5:36 PM, hevElee wrote:

    Without more information this is meaningless! Who is

    "average investor"? Were they self-managing their portfolio or were they invested in a managed 401K or in mutual funds?

    Looks like a great PR slide for all the financial consultant firms.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3073959, ~/Articles/ArticleHandler.aspx, 9/4/2015 11:47:54 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Kingkarn Amjaroen

Kingkarn Amjaroen is a financial analyst taking an interest in the basic materials, retail and financial sector.

Today's Market

updated 2 hours ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 3:59 PM
IVV $193.76 Down -2.95 -1.50%
iShares S&P 500 In… CAPS Rating: **
SPY $192.56 Down -2.99 -1.53%
S&P Depository Rec… CAPS Rating: No stars
VOO $176.58 Down -2.69 -1.50%
Vanguard S&P 500 E… CAPS Rating: No stars