Is This Why You Are Not Making Money in the Stock Market?
Main Street has a love-hate relationship with stocks. Some residents view equities as a winding, bumpy road to long-term wealth, while others find themselves stranded on the boulevard of broken dreams after two market crashes within a decade. Naturally, the market is filled with winners and losers, buyers and sellers, but the average investor could improve his portfolio by simply paying attention to the details once in a while.
Ignorance is not bliss when it comes to investing; it’s quite costly. A new survey from MoneyRates reveals that too many investors are driving blindfolded. More than one in five don’t know their primary investment goal when given a choice between basic objectives such as growth, liquidity, inflation protection, and preservation of principal. In fact, 12% of respondents couldn’t identify which asset class held the majority of their money. If you don’t look out the windshield to see where you want to go, your money will end up someplace you don’t want it to be.
“You probably would not get behind the wheel of a car without knowing where you are going, and you certainly would not drive that car blindfolded. However, this survey shows that too many people are investing with no idea of where they are going or even where they are now,” explains Richard Barrington, CFA, primary spokesperson for MoneyRates. “Setting clear investment priorities and regularly monitoring your progress in terms of those priorities are essential ingredients of responsible investing. Even with a conscientious effort, investment goals can be hard to reach. Reaching them without paying attention is nearly impossible.”
Making matters worse, investors paying attention may have their priorities backwards. The survey finds that nearly a quarter of all growth investors are primarily in cash, which is unusual considering that cash is virtually guaranteed to lose money over the long run. While these growth investors may intend to use their cash at a more opportune time, more than a quarter of investors seeking preservation of principal are primarily in stocks, where values fluctuate in nanoseconds and carry the risk of 100% loss. Either way, both groups of investors could benefit by realigning their portfolios with their financial goals.
“An optimistic view of these survey results would note that many of those polled are doing things the right way: They know what their top investment priority is and appear to have holdings that match that priority,” adds Barrington. “However, given what’s at stake, the numerous respondents who appear to have no idea where their investment program is going make the results quite disturbing.”
What happens when you lose sight of your goals? The average Joe is notorious for painfully underperforming the market — almost any market. According to a research note from Richard Bernstein Advisors, the average investor underperformed every category except Asian emerging markets and Japanese equities over a 20-year period ending December 2013. Between 1995 and 2014, JPMorgan finds that the average investor enjoyed only 2.5% annualized returns, just slightly better than the official inflation rate. A portfolio of 60% stocks and 40% bonds returned 8.7% on an annualized basis.
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