Most Investors Don't Do Well. Some Do. What Sets Them Apart?


I shared a depressing chart last week using data from analytics firm Dalbar, showing how individual investors have fared against an index like the S&P 500 :

It's sad.

But what explains it?

I asked Liz Ann Sonders, chief investment strategist at Charles Schwab, what she made of the data. Here's what she had to say. (A transcript follows.)

Liz Ann Sonders: "Look, when you look at very generalized statistics on how individual investors have fared in terms of performance compared to either the market overall, or if you look at things like the Dalbar study that compares investors returns themselves in funds versus the returns of the funds themselves, the generalizations taking a mean or an average or a median, doesn't put the individual investor in great light. It shows underperformance. Not all that different today than five years ago, 10 years ago, 15 years ago.

It's the reason why looking at what individuals are doing en masse is now a contrarian indicator, was a contrarian indicator 10 years ago, was a contrarian indicator 27 years ago, when I started in the business, so that aspect hasn't changed. What we have found, and as you said, we have some particularly unique insight into what individual investors are doing, having $2 trillion in client assets by individual investors, is what we find is there is a correlation in terms of returns and success with how disciplined you are around long-term plan and goals.

In many cases, if you have an advised relationship and you are going through an appropriate process of diversification and rebalancing, which is so important, staying disciplined, not reacting to whims or news and the ability to pull the trigger more quickly, but taking a very disciplined approach, the returns for that cohort of investors dramatically outshines the returns for investors who tend to be quicker with the trigger. And you're right, access to information, the speed with which we get it, and then the ability to trade on that has grown exponentially. It's just a question of what you do with that information."

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