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Why the Average Joe Loses to the Market (and What to Do Instead)

Why the Average Joe Loses to the Market (and What to Do Instead)

March 21, 2024

Over thirty years of data is clear: the average investor loses to the market.  The following chart shows the results of an annual study done by Dalbar comparing the returns of the average investor (investing in stock mutual funds) vs. the stock market as measured by the S&P 500 Index (500 largest US companies on the New York Stock Exchange).  What this long-term study finds year after year is that the average investor is consistently underperforming the S&P 500

Note that for the comparison here, the average investor is using stock mutual funds - which are baskets of many stocks (sometimes hundreds).  They aren't the worst thing someone could invest in.  In fact, they are going to be a much better choice for most people than investing in individual stocks because of the built-in diversification benefits.  If the study had been done using the average person investing in individual stocks, the results would be much, much worse!

The answer to what's causing the performance disparity is pretty straight forward: human behavior.  The average investor makes mistakes due to fear or greed that cost them returns in the long run.  Ironically, most of these mistakes are made in attempt to beat the market.  Here are two of the most common:

1. Chasing returns or "hot stocks".  See if this scenario sounds familiar: A friend or family member dabbling in investing thinks they might have stumbled on something like the next Apple (maybe "it's going to revolutionize AI!").  Or maybe they've found the cryptocurrency that's "going to replace the dollar"!  That all sounds pretty interesting because if they're right, maybe you could get rich and retire early!  But, like any "get-rich-quick" scheme, the results are usually underwhelming.  Additionally, this approach is usually accompanied by frequent trading and a short-term outlook, which drives down performance. Time is your friend as an investor.  Constantly treasure hunting for the "holy grail" of investments is not.

2. Jumping in and out of the market.  Getting out of the market to avoid downturns is not a good way of managing risk.  Studies have consistently shown that those who try to play the market in this manner hurt their returns worse than if they would've just stayed invested through the dip.  This is because:

a. It's impossible to accurately predict when to get out and when to get in.  Most investors find themselves panic selling when the market has already started to go down and being too nervous to get back in until they feel more confident, which is usually when the market has gone back up with some kind of consistency.  This results in selling low and buying high.

b. The best days in the market usually happen back-to-back with the worst days and if you're on the sidelines you will miss them.  Again, studies have been done that show missing the best days is actually more harmful to your portfolio's long-term performance than only missing the worst days.

So what can the average Joe investor do to increase performance?  Here are a few tips that we mentioned on our recent webinar, "Mastering The Mind Game: Navigating the Psychology of Smart Investing":

1. Implement disciplined investment strategies – come up with a plan and stick to it.

2. Plan for volatility AHEAD of time by:

a. Investing according to your risk tolerance - meaning invest according to the amount of downturn you can stomach watching your portfolio take.

b. Decide what events will cause you to make changes in your portfolio.  This way you're not swayed by every direction the winds of the markets are blowing.  Here are a couple of examples of good reasons to make changes (a market crash is not one):

1. When your life circumstances change (marriage, death, divorce, disability, retirement, etc)

2. If the macroeconomic situation changes substantially (inflation, interest rates, etc)

3. Invest with a long-term view.  Not weeks.  Not months.  At least 5 years.  Ideally, 10 or longer.

4. Diversify your portfolio so that the risk is spread across many companies and industries.  You can use around 4-7 ETF's or Mutual Funds to achieve this.

5. Employ expert advice. Be wary when getting investment advice from the news media or even the most well-meaning friends and family.  A financial advisor can help you make a plan, help you stay out of your own way emotionally, and talk you off the ledge when you are anxious.

If you or someone you know or love could use help investing, we're here.  Shoot us an email at to get started!