Over the last 30 years, the average investors’ portfolio has grown approximately 5% as compared to the S&P 500’s nearly 10% return  (Source: Dalbar)  However, investors aren’t crying in the streets because as just mentioned their portfolios have grown 5% annually over this time period.  So, despite the fact that they have woefully underperformed compared to the growth of the S&P 500,  investors are richer today and many are none the wiser that they have been the sucker.  Thank you Mr. Bull Market!  Why does the average investor underperform?

Market Timing

Fear is one of our basic instincts.  Fear leads us to make irrational decisions in all aspects of life.  But with investing, our fear of loss causes us to sell when conditions are deteriorating (sell low).  On the flip side, the fear of missing out (FOMO) causes us to chase markets and opportunities that are HOT! (buy high).  Buying high and selling low contributes to 70% of an average investors’ underperformance, according to Dalbar.

Compounding investor’s fear is the tidal wave of financial (mis)information we are fed everyday through Reddit and Twitter.  Sure following influential threads create a successful strategy for some, but it leaves others holding the bag.  Just ask the person that bought Gamestop (GME) at $483!

Put simply, the average investor should not attempt to time the market.  History has proven that they are really bad at it.  I know some of you will say, but I made 1000% in Dogecoin.  To that I say congrats, but don’t be a donkey!  Take your profits and buy a low-cost S&P 500 index fund.  You’ll thank me in 30 years. History is littered with examples of exuberant investors driving valuations skyhigh for unproven business models (e.g. pets.com, tulip mania, etc,).  


How deeply is the financial construct in your pockets?  The average investor working with a financial advisor is paying more than 1.5% annually in all-in costs.  Just know that all advisors are not created equal.  The easiest solution is to ensure you are working with a fiduciary advisor that put’s your interests above their own.  Such a crazy concept, right?  But you’d be surprised by the number of “advisors” that don’t follow this practice. 

The financial construct extracts their pound of flesh in a couple of ways:

  1. The Advisor Fee: Typically ranges from 0.5% – 1.0% of your assets under management and is debited from your investment accounts on a recurring basis;
  2. The Product Fee:  Can range from 0.0% to > 1.0%, depending on the type of advisor you are working with, and is debited directly at the fund level meaning you never see it;
  3. The Platform Fee: Most platforms are “free” for investors these days.  They make their money selling your orders and on the spread they earn from using your cash as collateral when making loans.

By now your eyes have blurred and your head hurts, but that’s the point.  Fee layers and obfuscation have allowed the industry to operate with this archaic construct for so long.  Add in Mr. Bull Market, where everyone’s accounts are growing, and nobody bawks.  It doesn’t make it right.

If you’re paying a 1.0% advisor fee, then make sure your advisor uses a no- or low-cost product strategy.  Don’t pay high fees on both ends, as your probability of performing worse than the markets over the long-term is very high.

Asset Allocation

When people are left to their own devices in making complex decisions they typically make mistakes.  Why would it be any different with investing?  Despite the financial machinery churning out enough financial literacy articles to fill the Library of Congress, average investors still don’t have a clue what investment to buy or when to buy them. 

It’s really important to develop a set it and forget it strategy for our retirement investments.  Some other tips and tricks surrounding retirement investments:

  • Don’t market time,
  • pick low-cost investment options (index funds and lifecycle funds are best), and 
  • feed that beast every month through an automatic process.  Direct payroll deduction is the best option, but it is not available for all people.  

Unfortunately, several internal and external factors work against us average investors, in our struggle for financial independence.  Just like in poker, professionals are really good at finding the fish and milking them for all they are worth.  They will paint a pretty picture and obscure details to make it seem like you are doing fine.  The information you need to make better decisions and gain financial freedom is within reach!  All it takes is accessing your situation and ensuring your actions set you up for success.