Most investors expect to get double digit returns on their portfolios. The more relevant question is how much buying power (after inflation) the market returns. While the market increases by about an average of 4.5% annually in REAL terms, investors give away the vast majority of those returns.
Point 1: Get Real…as in Real Returns
There is a natural belief that a professional investor working harder and smarter than the rest can earn a greater return that justifies the high fees and tax inefficiency. While some professionals have beaten the market over several years, they number fewer than random variation (otherwise known as luck) would have predicted.
There is also the belief that an individual investor (representing only about 10% of the market) has an advantage over institutional investors in selecting winning stocks and funds. In spite of stories we have all heard, the data shows overwhelmingly that the opposite is true.
The investor is better served by capturing as much return as capitalism has to give.
Point 2: Get Real…as in Reality Based
Human nature tends to be optimistic. We remember the good and forget the bad. An example of this is the majority of gamblers who think they made money in Las Vegas. Our mental accounting leads us to a conclusion that may not be correct since we can rest assured that the billion dollar casinos are not built to give money away.
The same phenomenon is true when it comes to investing. We believe what we want to believe. We remember and celebrate the brilliant investments and forget those that didn’t turn out so great. Wall Street perpetuates this fantasy since the more we believe the illusion of beating the market, the more money that can be made from the investor. We are constantly bombarded with the success stories while the losers are forgotten. Have you ever seen an advertisement for a Morningstar one star mutual fund?
It’s chasing the illusion of beating the stock market that nearly always results in the investor giving up most of their real return. If you can give up this illusion, you may be able to double your REAL return.