Why investors lag the markets

Published
  • October 04 2017, 11:28am EDT
There are multiple reasons clients may see their portfolios lag the returns they see in the financial press. As we noted in our related Q&A article, sometimes it comes down to diversification (they also have holdings in asset classes with lower returns that they seem to forget when they see the dazzling numbers in the stock market). And sometimes it's because they sell their investments at the wrong time.

We've collected industry research showing various attempts to quantify the shortfall of what the typical investor makes compared to the markets, as well as some of the reasons why.

This cover slide shows how investors’ returns lagged their funds’ returns from 2002–2016, according to Vanguard's research.

Investor shortfall

There are multiple reasons clients may see their portfolios lag the returns they see in the financial press. As we noted in our related Q&A article, sometimes it comes down to diversification (they also have holdings in asset classes with lower returns that they seem to forget when they see the dazzling numbers in the stock market). And sometimes it's because they sell their investments at the wrong time.

We've collected industry research showing various attempts to quantify the shortfall of what the typical investor makes compared to the markets, as well as some of the reasons why.

This cover slide shows how investors’ returns lagged their funds’ returns from 2002–2016, according to Vanguard's research.

The average investor underperformed many major asset classes during the 20-year period from 1996 to 2015, according to BlackRock's research, including equity, fixed-.income and gold.

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A hypothetical investor, investing $100,000 and letting it ride for 20 years, can expect to see his money grow to more than $460,000 (assuming annual returns of 8%). But because of typical human behavior (i.e mistakes), that investor can underperform by as much as 1.56%, according to Betterment. That small difference, chipping away year-after-year, can result in $118,000 less profit at the end of 20 years.

There are many ways that modern life can feel overwhelming. In fact, one-third of consumers worry they made the wrong purchase decision because they had too much information, according to Fidelity's research.

The 3 primary reasons for chronic shortfalls for both equity and fixed income investors fall under the following categories, according to Real Investment Advice:

1. Psychological factors
2. Capital not available to invest
3. Capital needed for other purposes