Have you ever ordered in a restaurant and when your food arrived you really wished you would have ordered the delicious looking dish the guy at the next table just got? The technical term is "food envy" and investment advisors recently report seeing a great deal of the investment version of the phenomena. The bull market that began in the depths of the "Great Recession" in 2009 is now five years old. Unfortunately, a great many individual investors have not participated. They abandoned equities during the recession and were too spooked to return and are now experiencing regret. Many are more than a little jealous of co-workers or relatives that made the correct decision and never left the market.
We now have a steady stream of potential clients asking "Is it too late to invest in stocks?" This really is the wrong question and any possible answer only leads to a perpetuation of the same thinking that caused these investors to miss the third best bull market in history. A better question is "Where do I go from here to meet my investment goals?" This is a great time to have a conversation with an independent, fee-only financial advisor and have a serious talk about risk and return and what you need your money to do for you. A good advisor will work patiently with you to determine your tolerance to risk and have that tolerance translated into a portfolio that will give you results that you will be comfortable with through the toughest market conditions. Doing otherwise will only lead you to repeat the same mistakes again and again.
The "Performance Gap" between what individual investors actually earn and what the mutual funds they invest in earn continues to be high.
The 10-year gap in performance between the average stock mutual fund and the average investor in those funds ballooned to 2.49% by the end of 2013 from 0.95% at the end of 2012. In sum, the typical investor gained 4.8% annualized over the 10 years ended December 2013 versus 7.3% for the typical fund. Individual investors tend not to get full performance from their fund investments due to their tendency to move out of stock funds in poor markets and move back in only after the market improves, (buying high and selling low). We have made helping our clients avoid the behaviors that cause this gap part of our mission statement. Again, this problem is wholly caused by investor behavior, not high fees or evil Wall Street money managers, as the popular press would have you believe.
We are now fielding questions from investors that are disappointed in recent returns from portfolios that truly reflected the downside loss thresholds they expressed after the "Great Recession". If you tell a professional money manager, " I don't want to experience losses in excess of x percent, they can and will design a portfolio that will most probably not exceed that loss threshold. It also will contain a lot of low risk/low return (fixed income) investments. The old adage "you tend to get what you ask for" is entirely true. So, when you talk to your co-worker or Uncle Joe and he made 20% last year, he was either willing to accept much more risk (somewhere around a 30% loss) or he has no idea what he's investing in. The former is ok (if that reflects his risk tolerance) the latter, however, will inevitably lead to an attempt at market timing and falling victim to the performance gap.
Investors sometimes expect professional advisors to produce market beating returns year in and year out. This is unrealistic and counterproductive. The correct expectation is to earn the best possible rate of return from a portfolio that will, most probably, not generate losses in down markets that will cause you to consider taking actions that will be detrimental to your goals, like selling a valuable assets at the worst possible time.
Studies like the one mentioned above by Morningstar show that this is all too common. The most valuable service an investment advisor can offer is to help individual investors examine their risk tolerances and guide them to globally diversified portfolios that will produce returns that allow them to achieve their financial goals and help them stick with that portfolio through tough markets. So... Let's talk!