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Asset Class Returns vs Investor Returns - Who Wins?

Updated: May 15, 2020

Asset Class Returns Compared To Investor Returns

History has shown that the psychology of investing is a huge driver of investment success. When emotion drives investment action, investors end up taking low probability actions.

Over time, the result of these actions is that long term returns earned by the average investor are well below what actually occurred in the markets, as can be seen by the chart on this page.

As you view this chart, you will note that between 1994 and 2013, the average retail investor under performed every single asset class listed on the chart (US Stocks, Real Estate, Oil, European Stocks, Gold, Bonds, and Housing). Over this time period, the average investor marginally outperformed inflation.

Asset Class Returns:

Source: JP Morgan Asset Management data as of 10/29/2014

The average investor over this time period compounded at 2.5% per year. Over that same time period the S & P compounded at 9.2% per year and bonds compounded at 5.7% per year.

Why is this the case?

These differences in returns can be at least partially explained by the way investing decisions are made in institutional environments vs. how retail investors make investment decisions.

Rather than following regimented guidelines and process, individual investors subconsciously allow behavioural biases to get in the way of rational thinking and decision-making.

It is important to recognize these biases can have a detrimental long-term effect on the growth of your financial assets.

Institutional investors and investors aided by professional money managers are held to strict standards and guidelines for both the allowable investments in their portfolios, as well as the circumstances under which changes and re-balancing can take place.

There are specific investment policy targets which hold a Registered Investment Advisor to a particular asset allocation, as well as boundaries to force re-balancing during market changes.

This creates discipline and structure, which helps to keep emotion and personal biases from clouding investment decisions.

The media plays a large role in driving the average retail investor’s actions. Heuristics, or the use of mental shortcuts to make a decision, is seen when individual investors make investment decisions based on easily re-callable events, or what has been working recently.

Inevitably, retail investors hear in the media that stocks are getting great returns, they eventually (but often too late), get comfortable with the idea of stock investing. Once this message is repeated enough, they move larger amounts of money into stocks, but are typically buying after much of the gain has already occurred.

Rather than making the smart decision to “buy low and sell high,” the average retail investor allows recent events and media chatter to control their investment decisions. The “buy low, sell high” mantra gets turned on its ear and they end up buying near market highs.

On the flip side, the media also plays a role in driving investors out of the market during declines. Many retail investors are highly influenced by loss aversion.

Studies have shown that the memory of pain and discomfort during portfolio declines has a stronger effect than the joy experienced due to portfolio gains.

The aversion to loss, partnered with the sensationalism by the media and market declines, can drive an investor to cash out at precisely the wrong time and keep them sidelined in cash from fear of additional loss.

These investor biases, combined with the constant bombardment by the media can push individual investors to make poor decisions and ultimately rob them of the long-term investment growth they are trying to achieve.

Investment Asset Flows

In looking at this chart from J.P. Morgan, you will notice that retail investors (the “do-it-yourselfers”), on the whole, are acting in complete opposition to institutional investors in the markets.

When you take a look at the chart, retail investors behave inversely to the professionals. On average, when retail investors are selling, the institutional investors are buying.

Professional institutional investors use specific strategies in order to improve the probability of achieving their return objectives for the least amount of risk. Those strategies will be discussed in a future blog but for now it’s important to highlight the importance of working with a professional before making any major decisions for your portfolio.

If you would like a second opinion on your current plan, please do not hesitate to contact us in order to set a call.

Rates are not guaranteed and are subject to change at any time without notice.

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