Do you suffer from a behavior gap?
The volatility of 2011 markets continues to prove that investors need two things 1) asset allocation and 2) commitment to a plan. As Dalbar
has reported, investment returns (passive investing) have significantly outpaced average investor returns over time. This gap is due to market timing, active investing, high fees and expenses, taxes, emotional investing, lack of diversification and lack of discipline.
2011 ended with large gains for bonds and a small profit for equities. However, the average mutual fund investor did not fare as well. For details, read a great book entitled Behavior Gap by Carl Richards.
Dalbar concluded that the average equity investor lost -5.73%, compared to a gain for the S&P of 2.12%. The average bond investor gained 1.34%, compared to a gain for the Barclays Agg. Bond index of 7.84%. With inflation for the last year at 2.96% (some would say much higher), the average investor is hurting.
Over a 20 year period, the average investor is not doing much better. I will adjust the numbers to a real return (real return is average return minus 2.56% inflation per year). Over the 20 years, the S&P had an average real return of 5.25% and the Barclays Agg. Bond index had an average real return of 3.94%. However, the average investor return was much worse. Only .93% per year real return for equities and -1.62% per year real return for bonds. The behavior gap continues to be a huge problem for investors. In today’s low return environment, you can’t afford to make these mistakes.
What can you do? Here are some ideas.
1) Work with an Advisor that is a 100% fee only fiduciary. By law, this person must put your interests first. Forget what the commercials or your Advisors say; Get it writing that the Advisor will be a fiduciary for YOU!
2) Focus on an optimal asset allocation for your stage in life and your individual risk tolerance.
3) Demand clear transparency regarding your costs and fees. Odds are, they are much higher than you think.
4) Stick to the plan and turn off the financial news.
If you would like a free 2nd Opinion about your strategy, contact us.
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