Average Investor is Failing
Article originally posted here by Paradiem
Ask anyone what they think of stock investing and you get many different answers. I’ve known experts who believe investing in the stock market is like gambling in Vegas. I’ve also known professionals who passionately defend owning the best and brightest companies in the US and around the world. It might surprise you, but both groups have great evidence to make their case.
Unfortunately, the answer is not as cut and dry as most people are comfortable with. At the end of the day, it’s all about the perspective of your experience. There is evidence that the results of the markets and the results of most investors are not the same.
If that surprises you, let me introduce you to a study that has been done for over 25 years by a company called Dalbar. Dalbar made a name for themselves by studying how the average investor has performed. They run their studies over 20-year rolling periods, but the results have been consistently frightening.
The results of the study from 1998 – 2018 was just published. What I will share with you here, reveals a similar difference that has existed since Dalbar began running their reports. This specific 20 years of stock investing includes two of the worst bear markets we have seen. It also includes a lot of volatility even as the markets have made an incredible recovery from the bottom in 2009. During those 20 years, the S&P 500 returned 5.6 percent per year. During that same time, the average investor only gained 1.9 percent per year. If you dig into these numbers a little more, you find these “average investor” returns don’t even keep up with inflation. Meaning, the average investor is losing spending power every year they invest if they fall victim to the averages.
What’s happening to cause such a disparity? On the surface, there’s an easy answer. People are acting irrationally. When things go poorly, they sell. When things go well, they buy. But what if something even more profound is going on?
In a previous blog post, I discussed how investors who let their emotions drive their decisions, perform substantially worse than those who take a long-term perspective. On the surface this is an issue of emotions, but at the end of the day, it starts with where your truth comes from. As Christian advisors, our basis and starting point is the Bible. We base our investing principles on the Kingdom of God.
Personally, I’ve found that investing based on God’s Kingdom, unlocks a perspective allowing many investors to eliminate the emotional tug-of-war. It also allows investors to focus on what matters and greatly improve the probability they will achieve results more in line with what is expected when you own the best and brightest companies in the US and around the world.
I’d like to explain three kingdom perspectives that can help improve your view on investing.
The first is found in Matthew 6:25. Jesus says, “Therefore, I say to you do not worry about your life, what you will eat, or what you will drink, nor about your body, what you will put on. Is life not more than food and the body more than clothing?”
On the surface, this appears to be a lesson on what we’re eating and wearing. Take a step back and consider that the majority of our life is typically consumed by one of those two things. Jesus is speaking about the everyday worries of life that cause us concern and get us off track from what we should be thinking about, eternity.
In the very next verse, Jesus says, “Look at the birds of the air, for they neither sow, nor reap, nor gather in the barn yet your Heavenly Father feeds them. Are you not of more value than they?”
We need to consider how important we believe we are to God. When the market experiences overall volatility, is our trust in our investment performance? Or do we trust God to take care of us?
We want to believe we’re trusting God, but the performance of the “average investor” tells us we are often trying to take God off of His throne and take control for ourselves. Trusting that God is good and has us in his hand is one key to eliminating worry.
The second perspective is found a few verses later, in verse 33. Jesus says, “Seek first the Kingdom of God and His righteousness and all these things shall be added to you.” God is saying if we make Him our first priority, then His commitment is to take care of everything else that is going on in our life.
We begin this process by discovering which investments would honor God. If we seek Him in the beginning as we make our investments, wouldn’t we trust Him to take care of how we’re invested? Do we feel the need to intervene?
The more I focus on myself, the more my worry tends to rise. However, when I seek God’s Kingdom and His priorities, I tend to worry less about myself and start to see the opportunities in the world around me.
I encourage you to live a life that embraces seeing the best in others and speaking love and kindness to others as you go through your day. Imagine if we spent our time thinking about and loving others the way that Jesus did when he walked the earth. We would be living out God’s principles and he promises to take care of what we have.
The third is found in Romans 14:17. Paul is speaking in relation to the scripture in Matthew when he says, “For the Kingdom of God is not eating and drinking, but righteousness, peace, and joy in the Holy Spirit.”
If we admit our first focus is around our temporary life, we realize we are missing the perspective of eternity. Paul reminds us of a simple lesson, “Our attitude will be driven by our focus.” The only things that will last beyond this life are the things we do for God’s Kingdom.
When I am focused on where God is moving and what God is doing, the gift I receive in return is unexpected peace and joy. I can’t control the world around me, but I can control the attitude and perspective I bring to the circumstances. God is asking me to align with His agenda because He knows what I’m facing when I try to do it alone.
Next time there is uncertainty in your life, I challenge you to take God at His word and put Him to the test. You don’t have to wait for the next wave of market volatility to look for God’s peace and joy in what He’s doing in your life.
Imagine the change you could see if you shifted to a Kingdom perspective. The gains you would see in your investments would be overshadowed by the peace you would experience from God’s provision in all areas of your life. Ultimately, this comes down to one principle that resonates from God’s Word. “If we take care of God’s Kingdom, He will take care of ours.”
I have no idea how the investment markets are going to perform tomorrow or next month. What I do know, is God has called me to invest. God has also promised to take care of me over the long term.
I’ve found it to be true, if I spend my time seeking His Kingdom, the amount of time I spend worrying about what’s happening on a day‑to‑day basis seems to dissipate.
You and I both know we can’t do anything to control the daily movements of the investment market. The results of the average investor seem to show that if we tried, we’d probably end up worse off than just doing what God is calling us to do anyway, which is to trust Him.