Many investors and advisors are familiar with the annual Dalbar Study.
It compares historical returns of mutual funds, asset allocation, and bonds to the returns generated by the average investor. It’s an excellent report, but Dalbar now charges $975 for advisors and clients to access and use the report.
Well, did you know that Morningstar puts out a similar annual report (if you click on the link below our blog post, you can take a look for free)
The “average investor” earns ALMOST TWO PERCENT ANNUALLY less than funds they invest in, whether those funds are "good" (above average) performers or not, and these results largely match the results of all previous rolling survey periods.
Compounded annually, this unnecessary drag on your wealth building snowballs over time, and results in a "reverse compounding" year after year that can leave you with as much as 50% less of a retirement nest egg!
The number one determinant of this lousy underperformance is YOUR BEHAVIOR and the good news is that there is a new professional certification that trains advisors specifically to target these unconscious wealth destroying behaviors which are found equally through ALL socio-economic and investor experience levels.
That's because FEAR and GREED, FIGHT or FLIGHT are atavistic emotions not controlled by our "university educated" brains. They're cave-person reflexes controlled by your Amygdala. Like many functions in your brain, your amygdala isn’t something you can control directly. You need it for reflexively running from saber tooth tigers, but it can disrupt your life if it drives you to whipsaw between excessive fear or anxiety, and euphoria. One has you yelling orders to "sell everything" while the other has you confidently buying more and more overpriced stocks on margin! Both will hurt you, over time.
The good news, is that this "Amygdala Function" can be efficiently outsourced to a competent financial advisor with additional training in this new field.
Maendel Wealth has a full-time credentialed Behavioral Financial Advisor on board! Learn more in our blog post here: Why You Need a BFA™ ( Behavioral Financial Advisor).
Before you say "Oh, it's not me, its those other guys", a little strategic humility might serve you and I well here. Understand that this study has been run annually for decades, with a sample of TENS OF MILLIONS of investor-directed 401ks which represent the most significant pool of investments for most Americans. (So it probably IS us, too! :)
The Annual Morningstar "Mind the Gap" study offers valuable insights for investors and financial advisors alike.
Here are some of the take aways and topics addressed:
Highlighting the Gap: The study shows a significant difference between what the average investor earns and what their investments actually generate. This underscores the importance of disciplined investing and avoiding impulsive decisions.
Dollar-Weighted Returns: The report discusses something called "dollar-weighted returns," which reflects how real-world actions impact investment returns. It reveals that when investors put money in and take it out of their investments matters.
Active vs. Passive Investing: The study compares the performance of actively managed and passively managed funds. Despite lower costs associated with passive funds, investors often earn less with them. This information can help advisors guide clients in making informed investment choices.
Dollar-Cost Averaging: The report explores the concept of dollar-cost averaging, where people invest a fixed amount regularly. Surprisingly, this approach doesn't always lead to better results. Advisors can use this insight to explain the pros and cons of different investment strategies.
Lessons for Improvement: The study suggests that investors can do better by making more disciplined investment decisions. Advisors can use this as an opportunity to educate clients about the importance of having a well-thought-out plan and sticking to it, especially during market ups and downs.
Reinforcing Financial Planning: The study hints that investors might benefit from working with financial planners who advocate a long-term, buy-and-hold approach with actively managed strategies. Advisors can use this insight to demonstrate the value they bring by providing guidance, discipline, and a big-picture perspective to clients.
In summary, the Morningstar "Mind the Gap" study provides evidence of the challenges faced by regular investors and the potential advantages of seeking guidance from financial advisors. It can be a helpful tool for advisors to educate clients, emphasize sound investment principles, and assist clients in making more informed choices to achieve their financial goals.
The number one takeaway, in our opinion, is that you are likely shooting yourself repeatedly in the foot with your INVESTING BEHAVIOR.
By trying your educated best to protect your family from down markets and participate fully in bull markets, you are unwittingly hurting yourself and your future wealth, cycle after market cycle. For 99.5% of do-it-your-selfers, that is a FACT borne out by one of the longest running and most complete data sets in world history.
Do YOU have a credentialed Behavioral Financial Advisor?
It might be well worth your time to inquire!
2023 Morningstar Investor Behavior study.
To view the latest study, please click on the following link:
You can learn more here: What is a Behavioral Financial Advisor, BFA™ ?
Jim Maendel is a credentialed Behavioral Financial Advisor through Kaplan University, and believes that these tools and disciplines are critical to clients success as they help fill in the gaps in traditional financial planning advice.
- "Financial planning was a big advance 20 or 25 years ago. Behavioral financial advice is at least as big. It is that revolutionary". -Think2Perform Advisory Council