Why You Lost Money When the Market Is Up

May 30, 2014
Jeff Brown, MD

Although the S&P 500 returned 11.1% annually over the last 30 years, the average investor only earned an average 3.7% annually. Why do we keep underperforming?

—In The Wall Street Journal, Jason Zweig cited a study in his column that the average stock investor earned an average 3.7% annually over the last 30 years. Unfortunately, the S&P 500 returned 11.1% annually.

Why did/do we so continually underperform even a basic index, you ask? We could just buy an ETF mirroring the index and make our 11.1%, right? One reason is that many will take money out to pay for a home, college, job loss, etc., and the unlucky timing of need sometimes forces us to sell in a down market. Likewise, some unexpected additions, such as bonuses, inheritances, etc., are sometimes invested at market highs.

Another reason for poor overall performance for individual investors in the stock market is the 1%-plus in fees most of us incur going in and coming out, according to the study. But the biggest factor in our lousy result—as you might wryly guess—is that most of us are vulnerable to chasing returns, instead of staying the course. You know, buying high and selling low.

I recently wrote of Warren Buffett’s constant admonition over the years to avoid this herd mentality. Our behavior reminds me of golf: we know what to do, we just can’t bring ourselves to do it properly!

—Subsequent to my recent mention of how specific wording in a real estate listing could boost a house’s sale price and sale speed by up to 10%, the WSJ published an analysis of $1 million-plus listings’ (the rule, not the exception, in my neck of the woods, Silicon Valley) language. The report showed that “perfect listings written in full sentences without spelling or grammatical errors” sell 3 days faster and are 10% more likely to sell for more than their asking price.

And you thought all those years of English class were not going to be profitable!

—Further WSJ mining came up with another interesting finding, this one from the City University of New York. Men with children earn higher median incomes than any other population group. The findings were consistent across age, educational level, occupation, race, and ethnicity. Call it the “Daddy Bonus.” Unfortunately, this did not apply to women with children. Call it the “Mommy Tax.” The “why the difference?” remains for further study. Or the reader’s imagination…

—I do read widely elsewhere for this column, believe it or not, and here is an example. Under the radar for some of us, there have popped up over 2,000 online degree programs in the US. About half rely on a third-party facilitator like Academic Partners to bring in the estimated $1 billion-plus already being paid in tuition. Even selective schools like the Ivy League and Stanford University are rushing to catch up.

Higher education is in the midst of nothing less than a revolution. Stay tuned.

Bloomberg Businessweek reports Americans spend over $100 billion a year on illegal drugs. That’s more than on electronics and appliances combined. And the US has more folks in prison than any nation on earth—70% of them on drug-related charges. Our putative “war on drugs” appears to be a colossal, embarrassing flop and we should find another way to manage the obvious strong desire of 5% to 10% of our population to take currently illegal drugs, no matter the cost.

—To finish on a happier note, you can be awarded up to 50,000 free miles just by switching to a new credit card. And it need not hurt your credit rating either. Just pay off the balance, write a letter to the issuer that you want to close the account and ask for written confirmation that the account was “closed by customer.” Then ask the issuer to report that information to the 3 credit bureaus. Finally, verify by getting a free copy of your credit report (check sites like creditkarma.com, annualcreditreport.com).

Another example of “free money.”