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Why Most Investors Underperform The Market
Happy Friday! In today’s email:
Why Most Investors Underperform The Market
September Rate Cut Is Coming, 25 or 50bps…
Nvidia Down 12% In The Past Week
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Stock Market Recap For The Week (Week return as of market open, Friday September 6th)
S&P 500 = -2.14%
Nasdaq = -2.59%
Dow Jones = -1.77%
Why Most Investors Underperform The Market
While we would all like to think we are great investors, the data shows otherwise. A study done by DALBAR, which is a financial services research firm, found something very interesting.
From 2001-2020, the S&P 500 (after inflation) returned 7.5% per year. Not bad.
If we compare that to the average investor, they did not do so hot. The average investor returned only 2.9% per year. Which is 4.6% per year LESS than the S&P 500.
What is this causing this difference?
It was found in the study that most investors try & time the market. They buy when the market is high & sell when they market is low. On top of that, the study shows the average investor holds on to their investments for only 4 years. Which is NOT that long, in the grand scheme of things.
This is the classic “I will buy when it is low & sell when it is high” idea that investors think they are doing, when in reality, most of them are buying high & selling low.
This is what I do to beat the average investor. It is so simple anyone can do it:
Invest every week, no matter what the market is doing.
I don’t care if the market is green that day. I don’t care if the market is red that day. I just keep on buying. Every Friday I put in the same amount of money. I don’t try & time the bottom. I just keep on buying.
Have a long time horizon.
Now I understand everyone can’t have a long time horizon, BUT, if you do have the ability to have a long time horizon (to me, that is 10+ years at a minimum), then the short term drawdowns in the market shouldn’t scare you. In fact, I see them as a good thing. Why? When the market is down, I get to buy the sale & get my shares for cheaper.
Don’t panic.
When we do have a drawdown in the market, it is VERY easy to panic. “Oh, my portfolio is down 10% this month, I am selling!” You have to control your emotions. You have to not let the day to day, short term fluctuations of the market affect your long term goals. I understand that is easier said than done, but it’s a must. On days when the market is down a ton, I close my portfolio, go outside & don’t think about it.
Invest money I don’t need short term.
Another reason for panic selling is people invest money they need. For example, I have always been against investing down payment money for a house (yes, even in 2021). Why? When the market is going up, it sounds like a great idea to invest that money. BUT, the minute the market turns red, most people sell out (& secure the losses) & they are down money for a house. For me, if I need that money within the next couple years, I don’t invest it.
Get rid of the “What If”
Hindsight is always 20/20. “If I would have bought Bitcoin in 2011, I would now have…” or “If I just bought Tesla in 2012, I’d be retired!”. We can’t go back in time, we can’t change what happened in the past. All we can do is look forward & keep on stacking assets.
What is the takeaway? I find this study very interesting. It is crazy to me that the average investor is getting sub-optimal returns compared to the S&P 500. Can you time the market & beat it? Yes, I am not naive to say everyone will lose trying to time it. But, the data shows most people will NOT beat the market over the long run.
I posted this study back in early 2023, but think it is a great time to revisit it.
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September Rate Cut Is Coming…
What is the takeaway? A lot more talk this week (& predictions) that a 50bps rate cut is happening in September. To keep up with these predictions, click here.
Nvidia Stock Down 12% In The Past Week
On Tuesday, Bloomberg reported the US Justice Department issued a subpoena to Nvidia as part of an antitrust investigation. This resulted in a sell off in Nvidia stock…
Read more:
What is the takeaway? Nvidia stock had the largest 1 day market cap loss in stock market history on Tuesday, September 3rd
JUST IN: Nvidia’s $NVDA market cap dropped by ~$280 Billion today the largest 1 day market cap loss in stock market history
— Evan (@StockMKTNewz)
8:00 PM • Sep 3, 2024
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