How Long-Term Investors Are Failing

I came across a great article today by Paul Merriman titled "7 Reasons Why Retirement Savers Fail." He explains how investors continue to work against themselves when investing and why they regularly achieve returns much lower than popular indices. The entire article is well worth a read but here are a few clips:

"In the 20 years ending Dec. 31, 2012, the Standard & Poor’s 500 Index compounded at 8.2% while the average investor in U.S. equity funds made only 4.3%. In other words, nearly half the return of the market was lost....How did investors lose half the return of the market? Where did it go? Three powerful forces took it away. First, investor behavior, mostly emotion-based buying and selling based on emotions, costs two percentage points. That brings the return down to 6.2%.Second, there's the cost of running funds that are trying to beat the market. The average annual cost of operating a fund, 1.3%, reduces the return further, to 4.9%. Third, portfolio turnover is almost always higher in actively managed mutual funds — sometimes much higher. This can take away another 0.6 percentage points, bringing the return down to the 4.3% reported by Dalbar."

"The latest report repeats a conclusion Dalbar has reached year after year: 'No matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments are more successful than those who time the market.' The answer, it seems obvious, is for investors to stay in the game. They will do that only if they have confidence in the choices they have made. I think the most dependable way to achieve the full returns of the market is to invest in a diversified mix of index funds with low expenses. If you couple this with patience and with enough bond funds to keep you within your comfort level, then I think you are likely to be more successful than 99% of all other investors."

Paul Merriman writes a lot of good stuff and I recommend anything he writes. If anyone is interested in reading more, check out his website. He has some free investing books that you can download!