EC Dalbar, 2016: Yes, You Still Stink At Investing (Tips For Advisors)

In order for individuals to invest, they must have discretionary “savings” with which to invest with. Unfortunately, between weak economic growth, stagnant incomes, rising costs of living and two major “bear” markets; nearly 80% of Americans simply are not able to participate as shown by numerous studies and statistical facts over the last few years:

  • According to the Pew Research Center, the median income of middle-class households declined by 4 percent from 2000 to 2014.
  • The Pew Research Center has also found that median wealth for middle-class households dropped by an astounding 28 percent between 2001 and 2013.
  • There are still 900,000 fewer middle-class jobs in America than there were when the last recession began, but the population has grown significantly larger since that time.
  • According to the Social Security Administration, 51 percent of all American workers make less than $30,000 a year.
  • An astounding 48.8 percent of all 25-year-old Americans still live at home with their parents.
  • According to the U.S. Census Bureau, 49 percent of all Americans now live in a home that receives money from the government each month, and nearly 47 million Americans are living in poverty right now.
  • In 2007, about one out of every eight children in America was on food stamps. Today, that number is one out of every five.
  • The median net worth of families in the United States was $137, 955 in 2007. Today, it is just $82,756.

You get the idea. The economic backdrop has not been one that allows for participation by the average investor in the financial markets. As I discussed in “For 90% Of Americans There Has Been No Recovery,” the Federal Reserve shows that the majority of the benefit of surging asset prices has been concentrated in the top 10% of income earners in the country, or those with capital to invest.

Fed-Survey-Median-ValueofAssets-Quintile-052916

The lack of capital to invest, for either reason listed above, has been a serious impedance to the growth of wealth over time.  But if you still aren’t quite getting it – let’s put it this way:

“If you have no debt and you also $10 in your pocket, that gives you a greater net worth than about 25 percentof all Americans.”

It’s Your Brain, Man

While the inability to participate in the financial markets is certainly a major issue, the biggest reason for underperformance by investors who do participate in the financial markets over time is psychology. Behavioral biases that lead to poor investment decision-making is the single largest contributor to underperformance over time. Dalbar defined nine of the irrational investment behavior biases specifically:

  • Loss Aversion – The fear of loss leads to a withdrawal of capital at the worst possible time.Also known as “panic selling.”
  • Narrow Framing – Making decisions about on part of the portfolio without considering the effects on the total.
  • Anchoring – The process of remaining focused on what happened previously and not adapting to a changing market.
  • Mental Accounting – Separating performance of investments mentally to justify success and failure.
  • Lack of Diversification – Believing a portfolio is diversified when in fact it is a highly correlated pool of assets.
  • Herding– Following what everyone else is doing. Leads to “buy high/sell low.”
  • Regret – Not performing a necessary action due to the regret of a previous failure.
  • Media Response – The media has a bias to optimism to sell products from advertisers and attract view/readership.
  • Optimism – Overly optimistic assumptions tend to lead to rather dramatic reversions when met with reality.

The biggest of these problems for individuals is the “herding effect” and “loss aversion.”

These two behaviors tend to function together compounding the issues of investor mistakes over time. As markets are rising, individuals are lead to believe that the current price trend will continue to last for an indefinite period. The longer the rising trend last, the more ingrained the belief becomes until the last of “holdouts” finally “buys in” as the financial markets evolve into a “euphoric state.”

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Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Streettalk Advisors, LLC expressly disclaims all liability in ...

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