The New Law of Averages: Don't Try to Beat Them

You just can’t win…

The S&P 500 has rallied more than 25% this year. The Dow is up 22%. And the NASDAQ has pushed to gains of more than 31%…

Unfortunately, that doesn’t mean a thing if you can’t meet (or beat) the averages.

Oh, and by the way– you can’t beat them. In fact, one study says you won’t even come close…

My trading colleague Jonas Elmerraji passed along a research note from DALBAR showing that over the last 20 years, individual investors’ gains came out to around half of the annual returns the S&P 500 earned over that same period.

And it gets worse…

The Average Investor Underperforms

“This chart from BlackRock shows an even bleaker picture,” Jonas explains. “Between 1992–2011, the average investor fared worse each year than just about every other asset class out there.”

So here’s the big question: How is this poor performance possible?

“For starters, most investors are terrible at timing markets,” Jonas says. “Too many folks held on to stocks through the carnage of 2008 only to sell near the bottom in 2009. And many of those people haven’t dared to get back in since, missing out on a 160% rally from the bottom…

“Lots of investors are still waiting for the market to retest those 2009 lows. Then again, lots of folks are waiting for a Blockbuster Video store to open back up in their town. I wouldn’t hold my breath for either.”

But hey, the terrible performance is not entirely your fault. You’re also getting eaten alive by fees.

“Wall Street is a fee-eating monster designed to nickel-and-dime your portfolio away commission by commission and charge by charge,” Jonas explains. “Even investors who stuck to their guns by parking their cash in mutual funds saw their performance numbers knocked down by hungry management fees.”

Regards,

Greg Guenthner
for The Daily Reckoning

Ed. Note: Jonas has found a way to get your investing back on track before the end of the year… The average open gain in his long-term portfolio sits at 73.3%. The positions his readers had the chance to close this year average 40.25%. The small stocks he follows aren’t just beating the S&P 500– they’re stomping it. And in this morning’s Rude Awakening email edition, I gave readers a chance to learn how to take advantage of Jonas’ incredible research. It’s just a small benefit of being a daily reader of the free Rude Awakening email edition. Don’t miss out on other great opportunities just like this one. Sign up for free, right here.

The Daily Reckoning