According to Graham Stephan, This Is the Biggest Reason Investors Underperform -- and He's Right

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  • Graham Stephan says the most costly investing mistake is not staying invested and missing out on the days with the best returns.
  • If you missed out on the 10 best days from 1992 to 2021, it would cut your returns by 54%.

If you jump in and out of the market, it could cost you.

Every investor has the same goal -- make money. But the average investor doesn't do the best job of it. YouTuber Graham Stephan recently shared data from JP Morgan showing the average investor's annual returns were just 2.9% over a 20-year period. For comparison's sake, the S&P 500 had annual returns of 7.5% over the same time period.

Stephan says that even if you make great investing choices, they can easily be offset by a few common investing mistakes. And the most damaging of all these mistakes is not staying invested.

How missing the market's best days can cost you

The biggest reason investors underperform is because they're not in the market on the best days. This could be because they were trying to time the market, or they panic sold, or they got out for some other reason. Regardless of why it happens, when you miss out on the best days, it has a significant impact on your returns.

It's easiest to see the financial impact with an example. If you invested $10,000 in the S&P 500 and kept it there from 1992 to 2021, you'd end up with $208,215. Here's how much that would change if you missed the market's best days:

  • If you missed the 10 best days, you'd have 54% less ($95,390).
  • If you missed the 20 best days, you'd have 73% less ($56,301).
  • If you missed the 30 best days, you'd have 83% less ($35,785).

Just by missing 10 days across a 30-year time period, you wouldn't even earn half as much. And it's impossible to predict which days will end up having the highest returns beforehand. Some of them happen during bear markets, when the market is down. Others happen during bull markets, when it's going up. In the last 20 years, seven of the best days have occurred within about two weeks of the 10 worst days, according to JP Morgan.

The good news is that there's a simple solution. Stay invested to ensure you benefit when the market goes up. Investors who overthink things and try to get in and out at the right time are typically the ones who miss out.

More investing mistakes to avoid

Stephan mentioned that there were a few common investing mistakes. Not staying invested is the big one, but it's worth going over the rest of them, as they can also cut into your returns. Here's what to avoid:

  • Panic selling: It's stressful to see your portfolio decrease in value, but this is also the worst time to sell. Instead, stay the course and continue investing as normal. A bear market could be when you make your most profitable investments.
  • Fear of missing out (FOMO): Be wary about investing in something just because it's trendy at the moment. Trends don't last long, so do plenty of research before you buy in.
  • Loss aversion: Don't wait around to invest because it seems like a bad time. The amount of time you're invested in the market is what's most important. Investors who wait often end up with smaller returns.

How the average investor can get above-average returns

We've gone over the usual mistakes that result in such low returns for the average investor. So, what should you do instead?

Stephan says the best way to generate wealth is to invest and stay invested in a well-diversified index fund. An index fund is one that invests in a number of different companies. There are many of them that invest in the S&P 500, which tracks the 500 largest companies on U.S. stock exchanges.

This is great advice that will work well for just about anyone. If you're a beginner and trying to figure out how to invest, start with a broker that offers quality funds you can invest in. Here are some options to check out:

Once you've found a stock broker and a fund you like, decide how much you want to invest per month. You may be able to automate your investments, depending on the broker and fund.

From there, it's just a matter of consistently investing and not selling. By doing that, you'll have your money in the market for all the best days, which will help your portfolio get the greatest returns.

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